Реферат: What Is Money Essay Research Paper What

money can also be controlled by the central bank by adjusting its interest rate

which it charges when the commercial banks wish to borrow money (the discount

rate). Banks usually have a ratio of cash to deposits which they consider to be

the minimum safe level. If demand for cash is such that their reserves fall

below this level, they will able to borrow money from the central bank at its

discount rate. If market rates were 8%, and the discount rate were also 8%,

then the banks could reduce their cash reserves to their minimum ratio, knowing

that if demand exceeds supply they will be able to borrow at 8%. The central

bank, though, may raise its discount rate to a value above the market level, in

order to encourage banks not to reduce their cash reserves to the minimum

through excess loans. By raising the discount value to such a level, the

commercial banks are given an incentive to hold more reserves, thus reducing

the money multiplier and the money supply. Another way the

money supply can be affected by the central bank is through its manipulation of

the interest rate. This is akin to the discount rate mentioned above. By

raising or lowering interest rates, the demand for money is respectively

reduced or increased. If it sets them at a certain level, it can clear the

market at level by supplying enough money to match the demand. Alternatively,

it could fix the money supply at a certain rate and let the market clear the

interest rates at the equilibrium. Trying to fix the money supply is not as

easy as this essay has suggested, so central banks usually set the interest

rate and provide the amount of money the market demands. The central bank

may also affect the money supply through operating on the open market. This

allows it to manipulate the money supply through the monetary base. It may choose

to either buy or sell securities in the marketplace, which will either inject

or remove money respectively. Thus, the monetary base will be affected, causing

the money supply to alter. To illustrate this, suppose the central bank sold

gilts worth ?10 million. ?10 million would flow from the deposits of the

purchasers to the central bank, taking the ?10 million out of the monetary