Question

What is the role of a monetary system in an effective financial system? a. Pass laws and set fiscal and monetary policies b. Create and transfer money c. Accumulate and lend/invest savings d. Market and facilitate transfer of financial assets

Answer 1

Answer: Monetary system- It is the set of laws and regulations, policies, framework and institutions through which, money keeps flowing in an economy of the country.

Pass laws and set fiscal and monetary policies- Monetary system makes the policies and set the rules to follow those policies. It involves decision of increase or decrease interest rates as per the inflation in an economy.

Example: monetary policy under which, Government cuts/increases Repo rate, reverse Repo rate, CRR, SLR etc.

Create and transfer money- Monetary system prints new currency and circulates it in the country. It makes the money as medium of transactions. monetary system makes the flow of money easy in an economy and it can be easily transferred anywhere in or outside the country in no time.

Accumulate and lend/invest savings- In a monetary system, banks and and financial institutions accepts deposits from those who have abundance of it and lend it to those who need it. Banks pay and charge interest over this borrowing and lending business. Interest income is the main income of banks.

Market and facilitate transfer of financial assets- Monetary system make the online trading in any financial instrument and financial product easy, investors can easily transfer and withdraw funds and can trade through online channel. They can redeem their funds anytime and money is transferred back to their account. Monetary system has made the capital markets more efficient.