Name
Course
Instructor
Commercial banks
Commercial banks have reserves to cater to future financial uncertainty or when there is a sudden increase of withdrawals bi the customers. When Chloe deposits $100 in the bank and the bank decides to put it in their reserves, the money supply in the economy remains the same as the money doesn’t have an outlet channel unless the banks decide to put it ready borrowing.
The methodology utilized by central banks to control the amount of money in circulation depends on the country’s economic situation and the power granted to the central bank. In the United States, the central bank is the FED or the Federal Reserve. Globally other prominent central banks include; Bank of England, Swiss National Bank, People’s Bank of China, European Central Bank, South Africa Central Bank, etc. Each country has its central bank.
The quantity of money circulating in the economy is both a microeconomic and macroeconomic trend. At a micro- level, a vast supply of money available or free money means more spending by businesses and individuals. At the macro level, the quantity of money in circulation affects items like the Gross Domestic Product, interest rates, unemployment, overall growth. The central banks tend to control the amount of money in supply to achieve the goals and objectives of the economy and affect the monetary policy. One of the ways it does that is like Chloe’s situation in that when a commercial bank receives a deposit, depending on the economic state of a nation, the central bank will have advised on what is the minimum reserve and lending amounts.