Assignment 1 Essay Example

The origin of central bank in different countries was surrounded by different purpose and situation which the country was facing. Some banks started with a special purpose which was issuing bank notes whereas some banks were created with the purpose of managing credit and improving the overall financial system. This paper will look at analyzing the purpose for which the Reserve bank of Australia was created and a comparison of the same has been made with Bank of England and American Federal Reserve Bank. In addition to it the paper will analyze the manner in which inflation has been managed by the central bank after world war two. This will help to understand the manner in which banks work and would help to determine the manner in which economic situations are controlled.

Banks carry out a bundle of functions but the main function which the Central bank carried out is developing monetary policies for the economy. Through the monetary policies banks looks at controlling inflation, managing bank notes and ensuring financial stability in the entire economy. The Reserve bank of Australia which is the central bank of Australia has the primary purpose of developing monetary policy for the entire economy. In addition to it Reserve bank of Australia further looks at maintaining financial stability and ensuring safety and efficiency in managing the payments (Joseph, 2016). The Reserve bank of Australia also looks at having active participation in the financial markets, managing the foreign reserves which the economy has and issuing currency notes for the entire system. It clearly shows that Reserve bank of Australia carries out a bundle of responsibilities and aims towards ensuring that the financial system within the economy is achieved.

The Reserve bank of Australia also aims towards ensuring that the liquidity is maintained in the economy. Different policies and decisions are taken by the Reserve bank of Australia keeping in consideration the economic situation and the manner in which economic conditions can be improved (Joseph, 2016). Overall decisions with regard to maintaining the financial stability of the economy is one major area which the central banks looks to carry out. The Reserve bank of Australia also drafts policies for other banks which they have to follow. Since, Reserve bank of Australia of is the supreme bank it lays down the rules and regulations with regard to cash reserve ratio and liquidity which banks have to maintain (Joseph, 2016). They act as a guardian and supervise the functioning of all banks as Reserve bank of Australia doesn’t directly come in contact with the customer. Instead they look at framing rules for other banks to follow.

The Reserve bank of Australia also looks towards ensuring that they have the required gold reserves so that internal and external value of the national currency can be managed. The central bank has decided the manner in which both the internal and external value of currency will be maintained so that people don’t use it for their own benefits and gain from different transaction which can be carried out. The Reserve bank of Australia thereby carries out different functions and look towards ensuring smooth functioning of the financial system (Joseph, 2016). Since, they supervise the working of other banks so the Reserve bank of Australia has a huge responsibility of ensuring that the overall banking system operates smoothly and financial stability is established.

In a similar way Bank of England and American Federal Reserve Bank which are central bank of England and Australia respectively; aims towards managing the financial system of their economy. The primary purpose of both the bank is to develop monetary policies so that inflation and money supply within the economy can be witnessed. In addition to it the both the central banks look at achieving financial stability, issuing currency notes and reducing the financial risk for the entire economy (Heron, 2005). The central banks are thereby created with serving the same responsibilities and purpose so that overall effectiveness can be witnessed in the financial system. The central bank looks at acting as guardian for other banks and determines the rules and regulations which banks need to follow. The overall functioning of the central bank is similar to Reserve bank of Australia and looks at ensuring that the economy functions smoothly and financial stability is established.

The different central banks further looks to ensure that inflationary conditions are controlled within the economy. To control inflation changes in monetary policies are undertaken so that the overall manner in which the economy is functioning does changes. Monetary policies are undertaken by the Central bank by making changes in the macro economic objectives so that inflation can be controlled and economic growth can be achieved (The Federal Reserve System; Purposes and functions, 2005). After World War II the Reserve bank of Australia, Bank of England and American Federal Reserve Bank have undertaken changes in monetary policies so that inflation can be controlled.

The central bank to control inflation has increased the cash rate. Cash rate determines the amount of liquid cash which other banks need to hold. This process helps to ensure that banks lending reduces as more and more cash needs to hold. This reduces the overall currency in the economy which thereby helps to ensure that inflation can be controlled as fewer money chases fewer goods (Dornbusch, Fisher & Startz, 2004). This process helps to ensure that inflation is controlled and better economic growth can be achieved.

The central bank further has looked at changing the reserve requirements which banks have to maintain. Central banks forces banks to maintain more liquidity with the central bank and reduce the overall liquidity that the bank have. As a result they are able to lend less thereby effecting borrowing which decreases spending and leads towards controlling inflation. This mechanism helps banks to control inflation within the economy.

In addition to it change in interest changes demand for goods and services. Having a high interest rate makes borrowing to be expensive which thereby reduces capital expenditure making total demand to fall (Dornbusch, Fisher & Startz, 2004). Interest rate also affects inflation and employment. An increase in rate increases unemployment as a decrease in demand causes companies to produce less resulting in more people to lose their jobs. This also effects inflation. With fewer goods being produced things become expensive. Since demand is low, prices come down. These result to bring down inflation rate.

Along with it the central bank has looked at developing both direct and indirect policies to control the overall supply of money within the economy. The central bank either looks at repurchasing the debt which the government and other person holds or increases the bond rates so that more and more people purchase it. This mechanism will help to reduce the overall supply within the economy (Dornbusch, Fisher & Startz, 2004). As a result the overall money supply will be reduced and the economic demand for goods and services will be reduced which will thereby help to control inflation. The Reserve bank of Australia, Bank of England and American Federal Reserve Bank have thereby adopted different monetary policies from time to time so that overall inflation can be controlled and the manner in which the economy works can be improved.

Thus, the central bank carries out different function and looks at managing the financial stability within the economy. In addition to it the Central bank looks at achieving economic growth and controlling inflation so that better growth rates can be achieved and economic growth and prosperity can be achieved.

References

Dornbusch, R, Fisher, S. & Startz, R. (2004). Macroeconomics. (9th Edition). McGraw Hill, Singapore.

Heron, E.L. (2005). The new governance in monetary policy: a critical appraisal of the Fed and the ECB. Macroeconomics and Macroeconomic Policies. Retrieved November 10, 2016 from http://www.boeckler.de/pdf/v_2005_10_28_leheron.pdf

Joseph, T. (2016). Monetary Policy, Reserve Bank of Australia, Australia

The Federal Reserve System; Purposes and functions (2005). Board of Governors of the Federal Reserve System, Washington D.C. Retrieved November 10, 2016, from http://www.federalreserve.gov/pf/pdf/pf_complete.pdf