Banks & Their Role
What is the main function of banks?
To collect deposits and provide loans
What is the primary goal of monetary policy?
Price stability
What does the interest rate affect?
The cost of borrowing
What is expansionary monetary policy?
Increasing money supply to stimulate the economy
How does monetary policy control inflation?
By adjusting interest rates
What do commercial banks mainly do?
Accept deposits and give loans to individuals and firms
Why is controlling inflation important?
To maintain the value of money
: What are open market operations?
Buying and selling government securities
What is contractionary monetary policy?
Reducing money supply to control inflation
How can monetary policy reduce unemployment?
By encouraging investment and economic activity
What is the role of a central bank?
To control monetary policy and regulate the banking system
What does full employment mean?
Everyone willing and able to work has a job
What is the reserve requirement?
The minimum amount of reserves banks must hold
When is expansionary policy used?
During economic slowdown or recession
What happens during a recession with monetary policy?
The money supply is increased to stimulate growth
How do banks contribute to economic growth?
By financing investments and increasing capital flow
What is meant by economic growth?
An increase in a country’s output (GDP)
What is the refinancing (discount) rate?
The interest rate at which central banks lend to commercial banks
When is contractionary policy used?
When inflation is high
Why is macroeconomic stability important?
It ensures sustainable long-term growth
How do banks influence the money supply in an economy?
: By creating money through lending (credit creation process)
How does monetary policy help maintain exchange rate stability?
By controlling interest rates and influencing capital flows
How do open market operations affect liquidity in the banking system?
Buying securities increases liquidity; selling decreases it
How do expansionary and contractionary policies affect aggregate demand?
Expansionary increases demand; contractionary decreases it
How does improper monetary policy affect the economy?
It can cause inflation, unemployment, or economic instability