1 . List and describe six primary functions of the central bank 2. What is the e

Question

1. List and describe six primary functions of the central bank

2.  What is the equation of exchange? What are the variables, which are in it, and how do they relate to each other?

3.  Outline to the policy choices for contractionary and expansionary options of the Fed.

4.   You have the assignment of making a recommendation to the Chairman of the Fed during a   period of persistent, high inflation. What could you do to restore stable prices?

5.   How will an expansionary monetary policy affect the GDP when the economy is at less than full employment? At full employment?

6.   Explain how interest rates and the price level can affect the demand for money.

7.   Why is the change in reserve requirement not frequently used to control the supply of money?

Explanation / Answer

(1) Six primary functions of any central bank are:

(a) The central bank has the sole authority and right to issue currency and legal tender money of the country.

(b) Central bank is custodian to the foreign exchange reserves and bullion of the country. This enables the central bank to maintain control over the foreign exchange market intervention.

(c) Central bank is the official banker to the government and caters to the government's funding needs.

(d) Central bank is the lender of last resort to the commercial banks, who can take loan from central bank for filling any gap in its funding requirements.

(e) Central bank sets the credit lending policy regulations to be followed by the commercial banks, and thus regulates credit creation policy.

(f) Central bank also is responsible for a country's growth in a prominent way: By formulating and implementing the monetary policy. During economic overheating, it lowers money supply by using contractionary monetary policy and during recession it raises money supply by using expansionary monetary policy, therefore leading the country on appropriate path of development.

(2) Equation of exchange states:

M x V = P x Y where

M: Money supply,

V: Velocity of money

P: Price level and

Y: Real GDP (So, P x Y = Nominal GDP)

In other words, these variables are related as follows:

Change in M + Change in V = Change in P (Inflation) + Change in Y = Change in nominal GDP

NOTE: First two questions are answered.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.