Question

1. Explain how a central bank is different to the other financial institutions such as Savings and loans associations, Credit unions, contractual savings institutions, and particularly commercial banks.
2. Explain how (i) open market operations (ii) reserve requirements and (iii) the discount rate can be used to stimulate spending in an economy in an attempt to boost economic growth.
3. An economy is suffering from a high and rising inflation rate. Explain how (i) open market operations (ii) reserve requirements (iii) the discount rate and (iv) moral suasion may be used to dampen the inflation rate.
4. Discuss arguments for and against the independence of the central bank.

3)      Include minimum and maximum cardinalities for each relationship shown in the ERD, using the Dia program.

Answer 1

The function of the central bank is to regulate banks, to control the operation of currency in the market, to provide loans to the government, to provide loans to banks, to control inflation and at the same time by coordinating fiscal policy with monetary policy of the country. Development has to be given importance. While accepting deposits of people through other financial institutions such as commercial banks, providing loans to people and engaging in other business functions, they are aimed at earning profits.

Open market operation use to infuse the money in the economy , by purchasing government security from market , It'll increase money supply in the economy. Ultimately the increased liquidity of market boost the investment and expenditure in economy.

Reserve ratio it can be of two types CRR , SLR ,RBI can decrease the rate of CRR and SLR so bank can have more money for credit creation and can provide more loan, loan which increases investment.

Central bank or banks provide discount on various types loans , to make them more attractive for consumers. with increasing loan disbursement , investment and consumption in economy boost up.

#Suffering from inflation,

By open market operation RBI sale the government securities in the market and absorb the liquidity from market and banks, so decrease liquidity can control inflation.

RBI through monetary policies ,can increase the Rate of CRR and SLR ,banks have to reserve more cash and less money for credit creation and loan disbursement.

Central banks and banks decrease the discount rate on various loans or provide no discount , so that the money supply can decrease in the market.

RBI through moral persuasion , persuade banks to properly implement monetary policies help RBI in inflation control by control on loans disbursement. All these options are to absorb money from market and control inflation rate in economy.