Federal Reserve Functions, Monetary Policy, and Economic Growth
Central Banking and The Federal Reserve
What is a Central Bank?
A central bank is an institution that typically performs the following functions:
- Accepts deposits from and makes loans to commercial banks.
- Acts as the banker for the federal government.
- Controls the money supply.
- Performs certain regulatory functions for the financial industry.
Functions of the Federal Reserve (The Fed)
Fed’s Banking Services
- Supplies currency
- Holds bank reserves
- Processes and routes checks
- Makes loans to banks
- Supervises and
Essential Balance Sheet Components & Definitions
Balance Sheet Components
- Non-Current Assets: Includes items like Property, Plant, and Equipment.
- Current Assets: Cash + Debtors + Stock
- Total Assets: Non-Current Assets + Current Assets
- Current Liabilities: Bank Overdraft + Trade Creditors + Other Short-Term Loans
- Non-Current Liabilities: Long-Term Borrowings
- Total Liabilities: Current Liabilities + Non-Current Liabilities (Derived from Accounting Equation: Assets – Equity)
- Net Assets (Equity): Total Assets – Total Liabilities
- Equity Components: Share Capital
Monetary & Fiscal Policy: Inflation & Deflation Impacts
Understanding Restrictive Monetary Policy
Restrictive monetary policy is a strategy used by central banks to slow down economic growth. It’s termed ‘restrictive’ because the central bank limits liquidity, reducing the amount of money and credit that banks can lend. This policy lowers the money supply by making loans, credit cards, and mortgages more expensive.
The effects typically include a higher exchange rate, a stronger financial account, and a weaker current account. The primary aim is often
Read MoreCore Macroeconomic Concepts: GDP, Inflation, Unemployment
1. GDP and National Income Measurement
Limitations of GDP in Terms of Production
- The informal economy
- Illegal activities
- Domestic work
Other National Income Measures
- Gross National Income (GNI) = GDP + income that domestic citizens earn abroad – income that foreigners earn in the domestic country
- Net National Product (NNP) = GNI – depreciation of capital
Challenges in GDP Comparison
- Different population sizes: Addressed by GDP per capita
- Different currencies: Addressed by converting GDP to U.S. dollars
- Different
Essential Business Finance Terminology Explained
Key Business Finance Terms Defined
- Business Angels
- Wealthy entrepreneurs who risk their own money by investing in small to medium-sized businesses that have high growth potential.
- Capital Expenditure
- Investment spending on fixed assets such as the purchase of land and buildings.
- Debt Factoring
- A financial service whereby a factor (such as a bank) collects debts on behalf of other businesses, in return for a fee.
- External Sources of Finance
- Getting funds from outside the organization, e.g., through debt
Key Concepts in Transportation and Trade
Space Tourism: Areas with a high influx of tourists (foreign or domestic) experience the highest densities in sun and beach tourism destinations.
Trade Balance: This refers to the registration of a country’s imports and exports over a specific period. The trade balance is the difference between exports and imports, reflecting a country’s goods sold abroad versus its purchases from other countries. There are two types:
- Positive: When the value of exports exceeds the value of imports (selling more than