Question

This is an essay question:

What is the reason the Central Bank was Created and describe the US Financial System

Answer 1

A central bank is an organization that primarily manages a monetary system of a country which may range from managing the currency or money supply and interest rates, but duties of a central bank varies from country to country.The primary purpose for the creation of central bank is to safeguard the banks from unforseen events such as bank panics which arises when a huge number of investors approach the bank for withdrawing of deposit money because they feared that the bank might become insolvent., and secondary purpose may include creating stability in purchasing power of money and central bank also control the inflation rate of a country i.e by controlling the flow of money.

U.S FINANCIAL SYSTEM

A financial system is medium which channels  funds from savings units to investing units.U.S financial system often contribute much to the efficient operation of an economy. The main purpose of the U.S financial system including the financial intermediaries and financial market facilitate the transfer of funds.

ELEMENTS TO THE U.S FINANCIAL SYSTEM

1.Money- it is used as a medium to buy goods and services

2.Financial instruments-formal obligation that entitle one party to recieve payments or share of assets from another party.

3.Financial markets-medium through which assets are bought ,sold and traded

4.Central banks-managing the monetary system of a country.

5.Financial institutions-such as commercial banks etc

FLOW OF FUNDS

The funds flow in a cyclical  way that is funds flow from financial middlemen such as brokers,dealers,and investment bankers to the deficit spending units i.e the ultimate borrowers these securities are called primary claim,because they are sold directly by the borrower and bought directly by the saver(lender) and reaches the financial intermediaries such as commercial banks ,thrift institutions,pension funds,insurance companies,investment companies and finance companies .They differ fom financial middlemen in that they issue secondary claim and reaches the surplus spending units i.e the ultimate lenders and from there it finally reaches the financial middlemen from where the whole process started.The cycle completed when the surplus spending units transfer funds to the deficit spending units.