Economics Notes

➡️ Commercial banks aim to achieve liquidity, security, and profitability through a variety of activities. These activities include taking deposits, making loans, providing payment services, and investing in securities.
➡️ Banks are able to generate profits by charging interest on loans and fees for services, while also investing in securities and other assets. Banks also manage risk by diversifying their investments and by maintaining adequate capital and liquidity levels.
➡️ Banks are subject to a variety of regulations and oversight from government agencies, which help ensure that banks are operating in a safe and sound manner. These regulations also help protect consumers from unfair or deceptive practices.

➡️ Money and banking is the process of creating and managing money and credit in an economy. It involves the regulation of financial institutions, the issuance of currency, and the management of the money supply.
➡️ Banks play a key role in the money and banking system by providing a safe place to store money and by providing loans to individuals and businesses. Banks also provide a variety of other services, such as investment advice and payment processing.
➡️ Central banks are responsible for setting monetary policy, which includes setting interest rates and controlling the money supply. Central banks also act as a lender of last resort, providing liquidity to the banking system in times of crisis.

➡️ Changes in the money supply in an open economy are largely driven by the actions of the central bank. This includes setting interest rates, buying and selling government bonds, and other monetary policy tools.

➡️ Changes in the money supply can also be caused by changes in the demand for money, such as when people decide to save more or spend less.

➡️ Foreign capital flows can also affect the money supply, as foreign investors may buy or sell domestic currency, which can lead to an increase or decrease in the money supply.

➡️ Commercial banks are a major source of credit creation in the economy. They create credit by taking deposits from customers and then lending out a portion of those deposits to borrowers.
➡️ The bank credit multiplier is the ratio of the total amount of credit created by a bank to the amount of reserves it holds. It is an important tool for understanding how banks create credit and how changes in the money supply can affect the economy.
➡️ The bank credit multiplier is affected by the reserve requirement set by the central bank, the amount of deposits held by the bank, and the amount of loans the bank makes. Changes in any of these factors can have a significant impact on the amount of credit created by the bank and, in turn, the money supply in the economy.

➡️ A central bank is a financial institution that is responsible for managing a country's monetary policy, such as setting interest rates, controlling the money supply, and regulating the banking system.
➡️ Central banks also act as a lender of last resort, providing emergency funds to banks and other financial institutions in times of crisis.
➡️ Central banks also play an important role in maintaining financial stability by monitoring and intervening in the financial markets to prevent systemic risk.

➡️ Increased government spending: Government deficit financing allows the government to increase its spending on public services and infrastructure, which can stimulate economic growth.
➡️ Increased borrowing costs: Government deficit financing can lead to higher borrowing costs for the government, as lenders may demand higher interest rates to compensate for the increased risk of default.
➡️ Increased inflation: Government deficit financing can lead to higher inflation, as the increased money supply can lead to higher prices.

➡️ Quantitative easing is a monetary policy tool used by central banks to stimulate economic growth. It involves the central bank buying government bonds or other financial assets from commercial banks and other financial institutions in order to increase the money supply and lower interest rates.
➡️ Quantitative easing can be used to help stimulate economic activity by increasing the money supply, reducing interest rates, and encouraging banks to lend more money. This can help to boost consumer spending, investment, and economic growth.
➡️ Quantitative easing can also help to reduce the risk of deflation, as it increases the money supply and can help to keep prices stable. However, it can also lead to higher inflation if the money supply is increased too quickly.

➡️ Increase in foreign exchange reserves: An increase in the balance of payments can lead to an increase in foreign exchange reserves, which can be used to purchase foreign currency and other assets.
➡️ Increase in economic growth: An increase in the balance of payments can lead to an increase in economic growth, as more money is available for investment and consumption.
➡️ Increase in international trade: An increase in the balance of payments can lead to an increase in international trade, as more money is available for imports and exports.

➡️ Monetary policy: This involves the use of interest rates and the money supply to reduce inflation. By increasing interest rates, the cost of borrowing money increases, which reduces demand and slows economic growth. This in turn reduces inflationary pressures.
➡️ Fiscal policy: This involves the use of taxation and government spending to reduce inflation. By increasing taxes, the government can reduce the amount of money in circulation, which reduces demand and slows economic growth. This in turn reduces inflationary pressures.
➡️ Supply-side policies: These involve measures to increase the supply of goods and services, such as deregulation and tax cuts. By increasing the supply of goods and services, the cost of these goods and services decreases, which reduces inflationary pressures.

➡️ The liquidity preference theory states that people prefer to hold money rather than other assets due to its liquidity, or the ease with which it can be converted into goods and services.

➡️ The demand for money is determined by the interest rate, which is the cost of holding money. When the interest rate is high, people are less likely to hold money and more likely to invest in other assets.

➡️ The demand for money is also affected by the level of economic activity. When economic activity is high, people are more likely to hold money in order to make transactions.

➡️ Loanable Funds Theory: This theory states that the interest rate is determined by the supply and demand of loanable funds in the market. The supply of loanable funds is determined by the savings of households and the demand is determined by the investment of firms. When the supply of loanable funds is greater than the demand, the interest rate will decrease, and vice versa.

➡️ Keynesian Theory: This theory states that the interest rate is determined by the level of aggregate demand in the economy. When aggregate demand is high, the interest rate will increase, and when aggregate demand is low, the interest rate will decrease. This is because when aggregate demand is high, firms will need to borrow more money to finance their investments, and this will cause the interest rate to increase.

➡️ Both theories agree that the interest rate is determined by the supply and demand of loanable funds in the market. However, the Keynesian theory also takes into account the level of aggregate demand in the economy, which the Loanable Funds Theory does not.

Economic stability

➡️ Fiscal policy: Governments use fiscal policy to influence the level of economic activity by adjusting taxation and government spending. This can be used to increase or decrease aggregate demand, which in turn can help to achieve macroeconomic objectives such as economic stability.

➡️ Monetary policy: Governments use monetary policy to influence the level of economic activity by adjusting the money supply and interest rates. This can be used to increase or decrease aggregate demand, which in turn can help to achieve macroeconomic objectives such as economic stability.

➡️ Structural policies: Governments use structural policies to influence the level of economic activity by making changes to the structure of the economy. This can include reforms to the labour market, the financial sector, and the tax system. These policies can help to achieve macroeconomic objectives such as economic stability.