Reserve Assets for Financing and Regulating Payment Imbalances

The Australian economy marks external stability as an important objective because it can influence other important aims such as economic growth, unemployment and inflation. External stability is the concept of sustaining a nation’s external accounts so that in the future, it is able to service its foreign liabilities and can avoid currency volatility. When looking at external stability, we must examine Australia’s balance of payments, which records all economic transactions between Australia and the rest of the world. Australia’s balance of payments has two components, which is the current account and the capital and financial account. The current account measures the receipts and payments for trade in goods and services, transfer payments and income flows, while the capital and financial account shows international borrowing, lending, purchasing and sales of assets.

The economists have divided deflation in two parts, good deflation and bad deflation. Good deflation comes about from improvements in the supply side of the economy and increased productivity. A simple aggregate supply and demand diagram will illustrate that an increase in the long-run aggregate supply curve can result in an increase in real output and a fall in the price level. If the level of real output increases, then we can assume that there is a lower level of unemployment as more workers will be needed to produce the higher level of output. Bad deflation finds its source in the demand side of the economy. Another simple aggregate supply and demand diagram will illustrate that a fall in aggregate demand will result in a decrease in the price level and a decrease in real output. If real output decreases, then it is assumed that the level of unemployment will rise, as firms will need fewer workers if there is less demand. Both causes of deflation result in a fall in the price level, but we might say that the first is positive because it results in an increase in real output and a fall in unemployment, while the second is negative because it results in a fall in real output and a rise in unemployment. After reading inflation, deflation should be a good turn around but we shouldn’t confuse deflation with disinflation, which is the opposite of inflation and is defined as the drop in the inflation rate

After the recent crash of the housing market which led to the collapse of the economy, the Federal Reserve Bank began to use an unconventional monetary policy called quantitative easing. The purpose of this policy was to stimulate the economy by lowering interest rates, increasing the circulation of money in the market and to ultimately decrease the unemployment rate. Although the idea of this phenomenon was to improve the economic status of this country, it can also affect the country’s financial system. The three major economic issues that can prevail from quantitative easing is inflation, depreciation in the exchange rate and the Federal Reserve Bank’s expansion of their balance sheet due to increase of security debts.

Current Assets: current assets such as cash, accounts receivable, inventory, supplies, prepaid insurance etc. are usually close to the amount reported on the Balance Sheet.

Several people assume since deflation is the opposite of inflation it is better. However, deflation can also harm the economy. A huge amount of unemployment is shown in deflation. An economic deflation is an indication that this economy is diminishing. The United States experienced deflation before. According to Kalen Smith, “Massive deflation helped turn a recession into the Great Depression. As unemployment rose, demand for goods and services fell” (http://www.moneycrashers.com/deflation-definition-causes-effects/). There are several factors that cause deflation. Some factors are changes in structures of capital markets, decreased currency supply, and decreased government or consumer spending. As a result, deflation can cause decreased wages, decreased business revenues and reduced value in investments. Overall, deflation slows down economic growth in economies.

Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) controlling money in the economy so as to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest so as to attain a set of objectives aiming towards growth and stability of the economy.

Monetary instability leads to large and unpredictable changes in the money supply whereby central banks attempt to monetize the debt through increasing interest rates which result in higher inflation. Inflation is the logical outcome of an expansion of the money supply in excess of real output growth. It also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of

Since independence, India's balance of payments on its current account has been negative. Since liberalization in the 1990s (precipitated by a balance of payment crisis), India's exports have been consistently rising, covering 80.3% of its imports in 2002–03, up from 66.2% in 1990–91. Although India is still a net importer, since 1996–97, its overall balance of payments (i.e., including the capital account balance), has been positive, largely on account of increased foreign direct investment and deposits from non-resident Indians; until this time, the overall balance was only occasionally positive on account of external assistance and commercial borrowings. As a result, India's foreign currency reserves stood at $285 billion in 2008, which could be used in infrastructural development of the country if used effectively. In September 2017 India's foreign exchange reserves crossed $400 billion

The bank maintains open market operations such as time deposit auctions and the repurchase transaction auctions depending on the need for maintaining the monetary values in line with the policies of the country.

The central bank is used to engage in the numerous financial transactions it deals with daily. It can supply currency, provide deposit accounts to the government and commercial banks, make loans, and buy and sell securities and foreign currency. As a result, this causes changes to the central bank’s balance sheet. The central bank’s balance sheet shows three basic assets, which are securities, foreign exchange reserves, and loans. The securities and foreign exchange reserves are needed so the central bank can perform its role as being the government’s bank. While the loans are a service to the commercial banks. Before the

This is because the only limit on reserve accumulation is its ultimate impact on domestic prices. Depending on the openness of the financial system and the degree of sterilization, this can be delayed for a very long time.2 In contrast, deficit countries must either deflate or run down reserves.

The liquidity issues can prompt systemic disappointment in installment frameworks (liquidity hazard) and prompt the breakdown in credit assignment. Amid late money related emergency, the vast majority of the national banks far and wide worked extra minutes to infuse liquidity to the budgetary framework through managing an account and close keeping money channels to maintain a strategic distance from systemic installment breakdown. Consequently, inadequate business sector liquidity will have resultant effect on a national bank 's exercises both as a moneylender of final resort and in its supervision of budgetary strength. In the result of money related emergency, it was watched that a large portion of the Governments around the globe have abnormal state of remarkable obligation due to their backing to the budgetary framework amid the emergency a great many. A fluid optional business sector results in lower acquiring cost for the Governments. A national bank would dependably work in close coordination with the Government to improve the respectability and effectiveness of the Government securities market.

Again XYZ can improve its balance of payment account if the economy is protected. By restricting imports, a country may try to improve its balance of payments position. The developing countries, especially XYZ, may have the problem of foreign exchange shortage. Hence, it is necessary to control imports so that the limited foreign exchange will be available for importing the necessary items. In developing countries, generally, there is a preference for foreign goods. Under such circumstances it is necessary to control unnecessary imports lest the balance of payments position become critical.

Some possible economic policies that can help to absorb inflow while maintaining an adequate monetary base in the

Covers debt and Current Account Deficit of Balance of Payment- Foreign capital inflow adds to our foreign exchange reserves, which is a cushion for the country’s Balance Of Payments.The reserve is used to cover maturing international debts and to cover the current account deficit of the Balance of Payment.