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(solved) Money and Banking: Assignment

Added on - 13 Nov 2020

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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 themechanism of each tool in case of expansionary monetary policy.Attempt Count: 2Central Bank is an independent organization under the state government which manageskey financial functions, such as issuing currency of the state, and maintaining the monetaryvalue, contribute to regulating the amount of money supply, and following up on all privatecommercial banks operations. (Blinder,1999) It is known that the central bank contributes tothe 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 theimplementation of the financial and monetary policies of the Government. Anothercharacterization of a central bank is a bank that deals with the development of financialplans of the state government, contributes to its implementation, and controls the fundswithin the economic sector. (Blinder,1997)The existence of the central bank in countries depends on the implementation of a set ofbasic functions, including:Currency Issuance: The chief function of the Central Bank is that it is the onlyauthority that has the power to issue securities, depending on obtaining the approvalof the specialized government. (Goodhart,1998) The central bank also controls thetotal amount of the currency in circulation.Bank of the Government: The function of the Central Bank as a bank of thegovernment is that its linked with the official nature that distinguishes it from the restof the banks; the government is keen to deposit funds in the Central Bank; becauseof the huge amount commensurate with the role of the Central Bank to maintaingovernment 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 indicatesthe need for commercial banks to retain part of their financial reserves as deposits inthe Central Bank, (Eijffinger & Geraats, 2006) which contributes to strengthening thefunction of the central bank to control the credit in banks and settle the debtsexchanged 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 centralbanks retain certain limits to deal with the normal banking operations; because of arange of important influences, (Eijffinger & Geraats, 2006) such as the nature of themarket cash, and the insufficient number of banks in the domestic market, toimplement all banking services within the banking sector.Several tools are used by the central bank to reach its monetary policy goals. Monetarypolicy 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 inthe economy more quickly than usual, to combat unemployment during the recession, ora deflationary process that expands the supply of money more slowly than usual to slowdown 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 monetarypolicy, which is to set prices. The interest rate is the central banks lowestpossible lending rate, under which it reimburses government securities and first-rate bills at commercial banks. When the central bank finds inflationary burdensstarting to arise, so it raises interest rates and hence borrowing from the centralbank becomes inflated, and as a result, commercial banks borrow less.(Garner,
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