Central Bank's Influence On The Market In The National Economy

Define the role of the Central Bank and its influence on the market in the national economy.

“Monetary policy is the process of supplying nominal money, look after the availability of money and cost of interest rate, which is controlled by the government or central bank, can be rather an expansionary policy, or a contractionary policy.” The expansionary policy is adopted to increase the whole amount of supply of money in the economy, and a contractionary policy is used to decrease the whole amount of nominal money supply. The central bank or government usually use the expansionary policy to fight against unemployment in a recession, where they lower the interest rate, so investment can grow. On the other hand the contractionary policy is the process of raising interest rate the aim is to fight inflation.

The IS/LM model stands for Investment Saving / Liquidity preference. In case where the nominal money supply is increased by the Central bank for any uses that will shift the LM curve to the right, this will cause a lowering of interest rate and a rising of Gross Domestic Product. In case where the Central bank wants to raise interest rate, than it has of course to decrease the money supply and shift the LM curve to the left and this will cause a fall of national income. In other words if the Central banks decides to raise the interest rate, consumers aren’t willing to take any credits that’s why the GDP, in which contains disposable income plus Investment plus government spending, will go down and the whole economy will be effected. To explain the IS curve in a better way, we take the example of the government, if the government decides to spend more on government spending and cut taxes for lower salary earners, than consumers ...

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...not in the short-run, that why FED lets the economy to boost when there is inflation in the short term. The problem economists are afraid is that in the long-run inflation will go out of control, so no Central banks or even not the government can do a thing against it. During inflation it’s hard for Central banks and politicians to estimate when they should react. Since in the United States the government is looking for more and more economy, the Federal Reserve Bank has in somehow a double task to do, in one hand the inflation shouldn’t that big that people aren’t able to consume anymore and on the other hand the economy should be stopped by reducing the inflation.

Reference:

http://www.ecb.int/mopo/html/index.en.html

http://www.house.gov/jec/fed/fed/fed-impt.htm

http://en.wikipedia.org/wiki/Money_creation

http://en.wikipedia.org/wiki/Interest_rate