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Central Bank: The Monetary Base Essay Example

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Central Bank: The Monetary Base

Central Bank: The Monetary Base. The monetary base is determined by the value of the currency in the hands of the people living in the country and also by the amounts of monetary reserves at the central bank as the deposit of all government banks to the central bank. And the amounts of the money supply is determined in the economy by the central bank by the monetary base and also by the amounts of loans disbursed by the central bank and all government banks of the economy. The role of the central bank in the money supply process is to price stability through appropriate changes in the amounts of the money supply through the changes in the amounts of the rate of interests and thus the amount of money in circulation in the economy.

The central bank lowers (increases) the rate of interest in the money markets to give greater (lower) amounts of loans to the people and investors in the economy. This increases (reduces) the amount of money in circulation in the economy and thus increases (reduces) the amount of money supply in the economy. Hence, changes in the market rate of interest are important tools of monetary control used by the central bank. Apart from this tool, the central can also raise the rate of interest on loans which are given to the commercial banks and thus reduce the amount of money supply in the economy by reducing the number of deposits to the commercial banks. Also, the central bank can increase the rate of interest which it pays to the commercial banks when it takes loans from those commercial banks. In this way, the central bank can raise the number of bank deposits, thus amounts of loans and hence, the amount of money supply in the economy (Mankiw, 2011). One of the most important roles of the central bank is to maintain the stability of prices of goods and services which are produced and/or sold in the economy. There are different techniques which are used by the central bank in regard to management of price and financial stability within any economic structure. Central Bank: The Monetary Base.



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preview essay on Central Bank: The Monetary Base
  • Pages: 20 (5000 words)
  • Document Type: Research Paper
  • Subject: Macro & Microeconomics
  • Level: College
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