Central BanksECON/GM 561University of PhoenixCentral BanksIntroduction
Concept of Money
Money’s a medium of exchange, for the buying and selling of goods and services. It‘s a social invention for which resources suppliers and producers pay, and receive payment from between two or more individuals, within a marketplace. Money is also a unit of account, such that it determines the value of goods in that currency. Societies have used many items as money, and anything that is widely accepted, can be used as a medium of exchange. Money typically consists of currency, coins and paper money, in the hands of the public. Furthermore, all checkable deposits exist, on which checks of any size ban be drawn.
The Role of Money
The role that money plays in the economy: “a medium of exchange that is usable for convenience with reference to buying and selling goods and services. It allows society to escape the complications of barter.” It‘s also permits definition of debt obligations, determination of taxes owed, and calculation of nation’s GDP.” Money is a storage place for value.
Checkable Deposits
How do banks create checkable deposits by issuing loans? This is the process banks create checkable deposits by issuing loans. A company goes to a bank, requests a loan, as long as their financial sound to the point that the bank believes it will be repaid, the company is granted the loan and given a promissory note. A promissory note is an IOU (physical check or money order), which consumers present at commercial banks as a medium of exchange. The previously stated shows the change in the composition of the money supply, which doesn’t change the total supply. The promissory note can also be given to the company in the form of a bank account, so the company can carry and use the funds conveniently (it’s not easy to carry large amounts of cash around to conduct activities, like shopping). The issuing of an account provides the bank with an interest-earning asset (promissory note, labeled as a loan) and creates checkable deposits (a liability). The issuing of a loan (IOU) is viewed as liabilities by the bank considering they are claims that banks and thrifts promise to pay “on demand.”
Central Bank differences
How are central banks different from other banks in terms of functions in national economy? Central bank is the manager of nation’s supply of money and credit and operates at the center of the nation’s financial system. It’s the banker for the federal government and the supervisors and regulation authority for a majority portion of nation’s banking and financial system. In 1913, after large amounts of deliberation, Congress passed the Federal Reserve Act to balance the financial needs of the country, to make sure that there is organized money and credit flow within the economy. Commercial Banks are institutions, which are mainly concerned with accepting deposits and making business loans, but they also offer related services. They also allow for a variety of deposit accounts, such as checking, savings, and time deposits. These institutions exist to make profits and owned by groups of individuals, yet some may be members of the Federal Reserve System. The difference between the central banks and other banks is the fact that central banks are in existence to keep the flow of credit and cash organized within the countries, while other banks exist to make a profit for the bank owners. The central banks are the issuers as directed by their board, which is given authorization by the government to put into circulation cash (paper money).
Reserve Bank of India
The Reserve Bank of India is the centralized banking authority of India. The Reserve Bank of India helped stabilize the domestic economy by regulating and supervising the financial institutions and markets. There was, however, a decline in the real GDP growth from 8.8 percent in 2003-08 to 6.7 percent in 2008-2009 (Reserve Bank of India, n.d.). The Reserve Bank of India did address policy changes in three primary sectors to help soften the global recession in 2008-09. The agriculture and allied activities has been supplemented and complemented by strengthening the farmers’ livelihood and income through programs such as the national Food Security Mission, Rashtriya Krishi Virkas Yojana, and the National Rural Employment Guarantee Scheme. The Reserve Bank also helped the industrial segment of the economy by giving indirect tax cuts and infrastructure spending, easing liquidity and interest rates, and encouraged banks to extend credit to smaller industries. Finally, the Reserve Bank of India granted permission to raise tax free bonds, remove interest ceilings on external commercial borrowing, advance the cap on investment in corporate debt market, eased refinance restriction from the Reserve Bank, and created the Special Purpose Vehicle to lend to non-bank financial companies (Reserve Bank of India, n.d.).
Monetary Authority in the United States
In economics, monetary authority is a term “for the entity which controls the money supply of a given currency, and has the right to set interest rates, and other parameters which control the cost and availability of money. Generally a monetary authority is a central bank, though often the executive branch of a government has de facto control over monetary policy by controlling the central bank. It’s important for Big Drive Auto to recognize that the monetary authority in the United States must be valued and understood not only from an economic standpoint, but also from a matter of law. It’s favorable for Big Drive Auto that the United States Government uses these measures to attempt to accomplish and/or sustain economic growth, price stability, and low levels of unemployment. (Richard M. Ebeling. 2003) The current and inevitable events of the banking crisis in the United States continue to force the political institution to face the need of necessary reform of the monetary and banking systems. Currently, the U.S. inflation has been unchanged for much of 2010. The U.S. Federal funds rate sets at 0.25%, and the discount rate is 0.75%. This has left the U.S. in a liquidity trap, making it difficult to stimulate economic growth without risk of severe inflation.
Bank of England
Currently, the Bank of England is dealing with a core consumer price index of 3.1% for the month of July, down from 3.2% in June. The United Kingdom has experienced downward pressure on their core CPI in transportation costs, clothing and footwear, miscellaneous goods and service, and recreation and culture. The largest upward pressure to the core CPI was in food and non-alcoholic beverages, furniture, household equipment and maintenance. The United Kingdom core CPI shows that its rate in June was above the provisional figure for the European Union as a whole was 1.9%. It’s apparent that the Bank of England is successfully managing the growth rate of the credit, and interest rates because their inflation rate is decreasing, and they are showing signs of economic growth. This is also important because monetary policy in the United Kingdom will impact other countries such as the United States and the European Union. This occurs because of value of their currency. As their currency decreases, the prices of imports go up, affecting other countries.
Conclusion
There are a number of central banks that appear to be effectively managing the growth rate of credit and interest; they are the Bank of England, and the Reserve Bank of India. The Bank of England has a CPI above the European Union by 1.9%. The Reserve Bank of India has helped stabilize the domestic economy by regulating and supervising the financial institutions and markets. The Bank of England using the present methods shows signs of stabilizing a domestic economy provided they can deal with the decline of their consumer price index. The United States Federal Reserve shows signs of being in trouble considering that though the economy is starting to rebound, it is fragile and has a possibility of going into hyperinflation status or deeper depression. The U.S. Federal Reserve has to implement many policies to have a chance to stabilize the domestic economy. The Bank of Japan is economically experiencing deflation, which they have yet to find a way to change and therefore they are not effective in stabilizing their domestic economy. The effect one central bank has on the global financial system is dependent on its size. If the U.S. Federal Reserve is unable to stabilize the U.S. financial system, further turmoil can result due in part to the size of the U.S. economy.
References
Ebeling, R.M. (2003). Ninety years of monetary central planning in the United States. Retrieved from http://www.thefreemanonline.org/from-the-president/ninety-years-of-monetary-central-planning-in-the-united-states/
Federal Reserve Bank of San Francisco. (2010). Federal Reserve Bank of San Francisco. Retrieved from http://www.frbsf.org/publications/federalreserve/fedinbrief/central.html
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InvestorWords.com. (2010). InvestorWords.com. Retrieved from http://www.investorwords.com/955/commercial_bank.html
McConnell, C. R. & Brue, S. L. (2005). Economics: Principles, problems, and policies. New York: McGraw Hill/Irwin
Reserve Bank of India. (n.d.). Annual report: economic review. Retrieved from http://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=896
University of Phoenix. (2010). University of Phoenix material – Big drive auto. Retrieved from University of Phoenix, ECO/GM561 – International Economics website.
Wikipedia. (2010). Monetary authority. Retrieved from
http://en.wikipedia.org/wiki/Monetary_authority
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