Central Bank's Influence On The Market In The National Economy

1007 Words 5 Pages
Define the role of the Central Bank and its influence on the market in the national economy.
“Monetary policy is the process of supplying nominal money, look after the availability of money and cost of interest rate, which is controlled by the government or central bank, can be rather an expansionary policy, or a contractionary policy.” The expansionary policy is adopted to increase the whole amount of supply of money in the economy, and a contractionary policy is used to decrease the whole amount of nominal money supply. The central bank or government usually use the expansionary policy to fight against unemployment in a recession, where they lower the interest rate, so investment can grow. On the other hand the contractionary policy is
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The raising of government spending is done by purpose, the state wants people to consume and invest more so the economy will grow faster. But the raising of interest rate is unexpected and not wished to be the perfect result of tax cuts, because higher the interest rate, lower the investment rate, and this has a negative effect on the economy.
The Central banks can create money in three different ways, the first is money creation, producing a new monetary unit, and this is the case when older currencies need to be changed because they can’t be used anymore. Another example is when a new EU member adopts Euros instead of their old currency. The second is credit creation, where Banks are lending money to other banks, the clue is that they are not dealing with money as cash but they use virtual money. The third is electronic creation which is the process of buying government bonds or other financial scriptures by central bank through Open market operations.
The primary objective of the European Central Bank is to maintain price stability within the Euro zone, or in other words to keep inflation low. “The ECB aims at inflation rates of below, but close to, 2% over the medium term.” It’s obvious that inflation can influence the savings and that’s why also investment, when the price of goods are rising and peoples’ income stayed the same so consumers have less money to save. Inflation can also used by the government…