Monetary and central bank

Topics: Monetary policy, Central bank, Money supply Pages: 6 (1726 words) Published: November 25, 2013


A central bank, reserve bank, or monetary authority
is an institution that manages a state's currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the amount of money in the nation, and usually also prints the national currency, which usually serves as the nation's legal tender.[1][2] Examples include the European Central Bank (ECB) and the Federal Reserve of the United States.[3] The primary function of a central bank is to manage the nation's money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis. Central banks usually also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behavior. Central banks in most developed nations are institutionally designed to be independent from political interference. In most cases they are not public, in the sense that they are neither state-owned nor directly regulated by government, parliament or another elected body.[4][5] Still, limited control by the executive and legislative bodies usually exists [6] .[7] The chief executive of a central bank is normally known as the Governor, President or Chairman.

Monetary policy
is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.[1][2] The official goals usually include relatively stable prices and low unemployment. Monetary economics provides insight into how to craft optimal monetary policy. Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.[3] What It Is:

Monetary policy is the means by which the Federal Reserve manipulates the U.S. money supply in order to influence the U.S. economy's overall direction, particularly in the areas of employment, production, and prices.

How It Works/Example:
Monetary policy is not the same as fiscal policy, which is carried out through government spending and taxation.

To understand monetary policy, it is important to understand a bit about the Federal Reserve, which is the central bank of the United States.
The Federal Reserve is a bank for banks. It has several branches around the U.S. hold deposits for and lend to banks. As a means of ensuring the safety of the nation's financial institutions, the Federal Reserve requires banks to keep a strict percentage of their deposits on reserve at a Federal Reserve bank. The Federal Reserve determines the appropriate percentage, called the reserve requirement. If a bank is unable to meet its reserve requirement, it can borrow from the Federal Reserve to meet the requirement. The interest rate on these funds is called the discount rate. (Banks can also borrow the excess reserves of other banks, and this interest rate, called the federal funds rate, is determined by the open market. The Federal Reserve works to keep the discount rate close to the federal funds rate.)...
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