Question 4.
(a) Explain the operation and activities of the Money Market. Why is there a need for such a market?
What is money market? A definition might be “the market in which short – term funds are lent and borrowed”. Money market deals in short – term credit instruments and provide working capital to industry and trade (Walmsley, 1992). The main purpose of money market is facilitate the transfer of short – term funds from lenders to borrowers, to help large corporations, banks and the government to either raise money to meet their short term obligations, park surplus money for the short term, transfer large sums of money. The money markets are also used by the central banks to set short term interest rates, at slightly better interest …show more content…
Monetary policy is the process of managing money supply by Monetary Policy Committee to achieve the stability and economic growth such as inflation, maintaining stable exchange rates, achieving full employment and economic growth (bankofengland, 2014). Monetary policy involves changing certain types of interest rates, which may directly or indirectly through open market operations; specified level of required reserves; or exchange on the foreign exchange market.
Inflation targeting involves the central bank stating explicit quantitative targets for inflation to be achieved within a specific time horizon. The central bank also dedicates monetary policy to achieving a low inflation rate and no other purpose. The intermediate target in this framework becomes the central bank’s own inflation forecast. If the forecast is for inflation to exceed its target, the central bank has to raise interest rates accordingly. By using the forecast rate of inflation as an intermediate target variable, the central bank can take into consideration a huge range of information. Any variable that influences inflation should be considered, including the exchange rate and the money
(a) Explain the operation and activities of the Money Market. Why is there a need for such a market?
What is money market? A definition might be “the market in which short – term funds are lent and borrowed”. Money market deals in short – term credit instruments and provide working capital to industry and trade (Walmsley, 1992). The main purpose of money market is facilitate the transfer of short – term funds from lenders to borrowers, to help large corporations, banks and the government to either raise money to meet their short term obligations, park surplus money for the short term, transfer large sums of money. The money markets are also used by the central banks to set short term interest rates, at slightly better interest …show more content…
Monetary policy is the process of managing money supply by Monetary Policy Committee to achieve the stability and economic growth such as inflation, maintaining stable exchange rates, achieving full employment and economic growth (bankofengland, 2014). Monetary policy involves changing certain types of interest rates, which may directly or indirectly through open market operations; specified level of required reserves; or exchange on the foreign exchange market.
Inflation targeting involves the central bank stating explicit quantitative targets for inflation to be achieved within a specific time horizon. The central bank also dedicates monetary policy to achieving a low inflation rate and no other purpose. The intermediate target in this framework becomes the central bank’s own inflation forecast. If the forecast is for inflation to exceed its target, the central bank has to raise interest rates accordingly. By using the forecast rate of inflation as an intermediate target variable, the central bank can take into consideration a huge range of information. Any variable that influences inflation should be considered, including the exchange rate and the money