Question

PAYMENTS IN A NEW DEMOCRACY

A country in Africa has recently undergone a revolution and is now governed by a popular democracy. In the past, all economic activity was undertaken by the autocratic leadership and their facilities, which no longer exist. The population of the country only survived in the past via various forms of barter, but now have to understand and establish modern functioning payment facilities. Start the process of understanding by describing some of the basics of payment in a letter to the revolutionary council.

Include:

Explain the the central bank’s role and the purpose of regulation;( 1 typed page)

Answer 1

The economies in different parts of the world, has their own domestic currencies of the different denomination ad are called money. These money in different forms, are used to trade goods and services as well as used to discharge all economic activities. The money is issued by the central bank of the respective country and duly guaranteed by the central bank for its stored value.

The modern functioning of the payment facility in this African nation, starts with the establishment of the central bank who has the not only the responsibility of the issuing currency and money of different form, but also to develop the overall banking system in the country. The central bank performs different roles in the economy. The first role is to regulate the economy in terms of the money supply to be present in the economy, inflation rate in the economy, interest rates in the economy and to ensure the economic growth of the economy. The second role is to issue the money and clear the checks as bill of exchange in the economy. It creates credibility to the currency and checks issued by one person to another. The third role is to become the banker of the bank where the central bank helps the banks to come out of financial trouble and maintain the investor’s confidence. The fourth function is to develop the platform where the flow of funds from one source to another is created and the economy grows when funds are utilized for the production activities.

In all these roles played by the central bank, regulation of the economy is important due to the following reasons:

1. Interest of the investors are protected.

2. Banking system works in one particular direction that helps the economic growth.

3. Ant-social elements don’t participate in the banking and economic activities.

4. To preserve the stability while stimulating the growth.

The money created by the central bank should have different functions and abilities. The first function is to be the money being a medium of exchange. Money should be the only way, a trade can happen. The second function of the money is that it can store value so that people recognize it and carry it for trade. Its value does not fluctuate. The third function is the money being a unit of account that can be used to identify the profit or loss for the business.

Hence, the currency or money issued by the central bank should be used for the payment process and it should be guaranteed by the central bank for its storage of value and recognition. It will also add the creation of the money supply and channelization of the funds. For example, the deposits made by one person will be issued to the another person as loan after maintain the reserve requirements. And that person will make deposits in another bank and again the deposits will be reissued to the next person. In this way, the money creation will take place and payment process is in place.