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ECM 102 Money and Banking Assignment Question: Central Bank
Added on -2020-11-13
(Alesina & Summers, 1993) Bank of Banks: This function is associated with banking knowledge, which indicates the need for commercial banks to retain part of their financial reserves as deposits in the Central Bank, (Eijffinger & Geraats, 2006) which contributes to strengthening the function of the central bank to control the credit in banks and settle the debts exchanged between commercial banks.
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Course Name/Code: ECM 102 Money and BankingAssignment Question: Identify the main functions of the central bank in the economy? What are the tools usedby the central bank in order to achieve its monetary policies goals? Explain the mechanism of each tool in case of expansionary monetary policy.Attempt Count: 2Central Bank is an independent organization under the state government which manages key financial functions, such as issuing currency of the state, and maintaining the monetary value, contribute to regulating the amount of money supply, and following up on all private commercial banks operations. (Blinder,1999) It is known that the central bank contributes to the provision of a range of banking and financial services to the Government of the State
and is concerned with the follow-up of the system of commercial banks and the implementation of the financial and monetary policies of the Government. Another characterization of a central bank is a bank that deals with the development of financial plans of the state government, contributes to its implementation, and controls the funds within the economic sector. (Blinder,1997)The existence of the central bank in countries depends on the implementation of a set of basic functions, including: Currency Issuance: The chief function of the Central Bank is that it is the only authority that has the power to issue securities, depending on obtaining the approval of the specialized government. (Goodhart,1998) The central bank also controls the total amount of the currency in circulation. Bank of the Government: The function of the Central Bank as a bank of the government is that its linked with the official nature that distinguishes it from the rest of the banks; the government is keen to deposit funds in the Central Bank; because of the huge amount commensurate with the role of the Central Bank to maintain government funds, and contributes to the provision of services such as monetary, financial advice and stock follow-up to develop the state's fiscal policy. (Alesina & Summers, 1993)Bank of Banks: This function is associated with banking knowledge, which indicates the need for commercial banks to retain part of their financial reserves as deposits in the Central Bank, (Eijffinger & Geraats, 2006) which contributes to strengthening the function of the central bank to control the credit in banks and settle the debts exchanged between commercial banks.Conduct normal banking business: are the functions applied by the Central Bank thatdoes not include dealing with individuals and enterprises; however, most central banks retain certain limits to deal with the normal banking operations; because of a range of important influences, (Eijffinger & Geraats, 2006) such as the nature of the market cash, and the insufficient number of banks in the domestic market, to implement all banking services within the banking sector.Several tools are used by the central bank to reach its monetary policy goals. Monetary policy refers to measures set by the central bank to control the supply of money. (Filardo,2000) Through this process, any country can control inflation and control interest rates. Monetary policy is either expansionary, targeting the overall increase in money supply in the economy more quickly than usual, to combat unemployment during the recession, or a deflationary process that expands the supply of money more slowly than usual to slow down inflation. (Clarida, Gali &Gertler, 1998) Monetary policy differs from fiscal policy, which discusses government spending, taxes and associated browsing.Tools used in expansionary monetary policy are: Interest rate policy: A key tool for central banks to control the country's monetary policy, which is to set prices. The interest rate is the central banks lowest possible lending rate, under which it reimburses government securities and first-rate bills at commercial banks. When the central bank finds inflationary burdens starting to arise, so it raises interest rates and hence borrowing from the central bank becomes inflated, and as a result, commercial banks borrow less.(Garner,
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