Importance Of Money Banking And Financial Markets Economics Essay

Chemical bond Market is a mechanism where purchasers and Sellerss of Financial Securities trade a fiscal claim of belongings on the money given to another individual for a specified period of clip at a peculiar rate of involvement. Chemical bonds are the economic indexs for finding involvement rate over the loan obtained by private corporations and govt.

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Interest Rate is the cost of borrowing or the monetary value paid for lease of financess or the monetary value for non utilizing his ain money. Interest rates vary with the period of loan. For long term loan, it is lower. For average term loan, it is about mean but for short term loan, it is normally higher than norm. Interest rates derive the economic system by increasing or diminishing the money supply in the fiscal markets.

Demand for Money Interest Rate Supply for Money

When the cardinal bank wants to command rising prices by cut downing money supply in the economic system, it increases involvement rate which consequences in low demand for money. But this factor causes low investing, accordingly people become unemployed and national end product falls.

On the other manus, when cardinal bank wants to hike up economic and concern activities in the state, it allow commercial Bankss to progresss loans at low rate of involvement, accordingly supply of money in the economic system increases. At this phase people have much more investing chances but they have no or low nest eggs. With falling involvement rate and more supply of money consumers rush towards the ingestion of money on different merchandises and services which causes general monetary value degree to raise hence rising prices additions with the lessening in involvement rates.

Stock Market:

Stock Market is a market topographic point where Stocks ( Common Stock, a portion of ownership in the corporation & A ; acirc ; ˆ™s gaining and assets as a security for the money provided by single investor to the company ) of different companies are traded. Monetary values are quoted in the market demand and supply of portions of a peculiar company. Higher portion monetary value indicates that the personal businesss of corporate are being conducted in conformity with the regulations, policies and committedness which the managers assure to each single stockholder.

Foreign Exchange Market:

FEM is that market topographic point where currencies from one state ( say PKR ) to another state ( say US $ ) are traded. Foreign Exchange has strong impact on the economic place of any state. When 1US $ = 52 PKR, Pakistan have less exports to other states because Pakistani merchandises are expensive for foreign importers as compared to when 1US $ = 86 PKR as they get less Pak- rupees against one US dollar. On the other manus, when 1 US $ = 52 PKR, Pakistan have more imports from other states because Pakistani importers have to pay less Pak-rupees to acquire dollars as compared to when 1 US $ = 86 PKR.

2 ) Why Study Banking and Financial Institutions?

Structure of Fiscal Systems:

Finance means the direction of Money and financess. Companies need such financess for long term investings and for running their twenty-four hours to twenty-four hours operations. Individual families save and indirectly lend their nest eggs to such corporations. Banks, Insurance Companies, Common Funds, Investment Banks, Salvaging Banks and finance Bankss are fiscal mediators, who takes sedimentations of families and impart it to the corporations and consumers. Against the nest eggs of families, it gives involvement at lower rates to families but charge high rate from companies or consumers for the loan given to them. The difference between these two rates is the net income of fiscal mediators.

Banks and other Financial Institutions:

Banks are fiscal establishments that accept sedimentations and do loans. Banks include Central bank, Commercial Bankss, Investment Bankss, finance Bankss, Salvaging Bankss, loan associations, recognition associations, common financess, pension financess, insurance companies and other such like establishments who act as an mediators between those who lend and who borrow. Against the loan or loaning, Bankss take collaterals and make full other legal paperss as a warrant to acquire their money back. Normally Bankss provide consumer loans every bit good as industrial but consumer financess bear more rate of involvement than industrial because they are non-productive in nature.

Fiscal Invention:

Invention means betterment in the old systems or procedures. Today Bankss are introducing with different fiscal instruments and options which start with the Information Technology to E-Finance. In old ages, people withdraw money by make fulling a check but today by ATM. Account balance can be checked at place Personal computer. Consumer finance including Car, house, matrimony and other installations are portion of this invention. Foreign Trade through L/C or TT and local trade by DD and TCs are besides advanced thoughts. Now Bankss offer insurance installation, running finance, partnership, educational loans, cabinets installation and other fiscal service are a manner to pull clients and doing their net incomes higher and higher.

3 ) Why survey Money and Monetary Policy?

Money is anything which is by and large accepted in payment for goods or services or refund of debts. Changes in economic variables are the consequence of alteration in money supply in the economic system and therefore pecuniary policy holds critical importance for the economic system.

Money and Business Cycle:

Business Cycle is the uninterrupted alteration in the place of concern from Boom to worsen to depression to recovery and so to din. In the period of roar, economic system has much more money supply and higher production and sum end product. Labor force is employed and there is less rate of unemployment. With the higher rate of involvement, money supply autumn and now national end product and production comes down which consequences in the higher rate of unemployment in the period of worsening economic system. When economic system is at its depression phase, unemployment rate is really high with highest rate of involvement which consequences in low money supply and bottom degree of national production. Finally when economic system is at the phase of recovery, money supply increases with the addition in production and end product, which consequences in the low unemployment rate. This rhythm repetition it once more and once more.

Money and Inflation

Inflation is the uninterrupted rise in the monetary values of goods and services in the economic system. The mean monetary value of goods and services in the economic system is called aggregative monetary value degree or monetary value degree. Such addition in the monetary value degree affects the persons, concerns and govt. Most likely cause of this rising prices is the addition in the money supply in the economic system which increases purchasing power and ingestion tendency of people. When many people rush to purchase a peculiar goods or services, its monetary value rises and hence it consequences in addition in rising prices in the economic system. Price degree and Money supply by and large move near to each other. Formula for ciphering rising prices is the rate of alteration in the monetary value degree relation to a base twelvemonth & A ; acirc ; ˆ™s monetary value, what we study in index figure computation. Countries holding higher rising prices rate must hold higher degree of money supply and frailty versa. Milton Friedman says, & A ; acirc ; ˆ?Inflation is ever and everyplace a pecuniary phenomenon. & A ; acirc ; ˆA?

Money and Interest Rate:

Interest rate on the bonds and bank loans fluctuates with the alteration in money supply in the economic system. With more supply of money in the economic system, there will be low involvement rate and with less money supply, economic system bears high involvement rates. So, involvement rate and money supply are two of import factors of pecuniary policy of any economic system.

Behavior of Monetary Policy:

Central bank of the economic system like SBP regulates the money supply and rate of involvement to explicate a sensible and growing oriented pecuniary policy so that all economic variables show their favourable motion for economic system growing and prosperity.

Fiscal Policy and Monetary Policy:

Monetary policy is the supply of money in the economic system to command rising prices, national end product and other economic variables while Fiscal policy is the determination of govt. sing its grosss ( revenue enhancements ) and expenditures ( development outgos ) . Budget shortage is the addition in govt. expenditures over its grosss. Budget excess is the addition in govt. gross over its outgos. In the period of budget shortage, govt. takes developmental loans from Central bank, fiscal mediators, IMF, World Bank, Assian Development Bank and other fiscal establishments to run into their fiscal demands. Budget shortage besides consequences in the addition in money supply and hence involvement rate additions. Surplus or shortage is usually measured as a per centum of GDP or aggregative end product of the economic system.


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