MONEY AND BANKING ASSIGNMENT Essay Example | Topics and Well Written Essays - 2000 words

currency AND BANKING ASSIGNMENT - Essay ExampleBesides, they also purchase and sell bonds.Macesich (2000) argues further that money plays a critical role in the economic activities since it virtually makes economic transaction possible. When the leave of cash is higher in the economy, consumers tend to have more money. This in turn encourages spending. On the other hand firms or businesses or ventures respond by increasing either raw materials or production. Because business activities tend to be spread, the imply for labor as well as capital goods increases. Increase in expansion of money cut consequently results into increase in prices more so if the growth of output approaches the limited capacity. At this stage, consumers demoralise anticipating inflation. However, lenders begin aggravating for higher interest rates to balance the anticipated reduction in the get power while offsetting the loans. The converse is true when money supply subsidizes or the growth rate declines . For instant, federal official Reserve policy plays a crucial role in determining money supply. It does so by influencing its deposits in the bank. They do this by mandating commercial banks to hold part of the deposits that they accept. These institutions comply by either retentivity cash in the vaults or holding deposits that they make at the Federal Reserve. The Federal Reserve in turn manipulates their reserve by lending cash to banks and changing the discount rate on loans. Therefore, when the supply of money in the economy is high, despite the interest rate target, the central banks tend to device mechanism that are aimed at limiting cash flow in the economy. When this is done, the demand for cash that is apparently at the bank reserves increases. This increase in the demand compels the central banks to stop holding money in the reserves.Central banks encounter a challenge of policy enforcement in the domestic banking system