It is necessary to manage the risks of these activities. For example credit risk is the most important risk to manage. Some of the activities in the off-balance-sheet are fees, loan sales, and derivatives trading help banks to manage their interest rate risk 8. What is the essential difference between the Keynesian and the monetarist view of how money affects the economy? Monetarists assumed that velocity is relatively constant, so that controlling M1 is the essential factor in influencing the non-inflationary output of the economy.
Debt is the accumulation of deficit. The national debt has recently been growing, so how does it really affect individuals? Interest rates go up on credit cards and loans, this is great for the federal government but not for you. National debt refers to government liabilities and there are various concepts of debt. There is public debt, where treasury bonds are bought this means that portions of the debt are held by government accounts and the other portion is held by the public.
If the government revenue more than total amount of government expenditure is known as budget surplus. Conversely, government revenue less than government expenditures is known as budget deficit. Taxation and government expenditures which are direct influence the economy of a country in both short term and long term. Most countries are faced the budget deficit state, the government proposed the balanced budget amendment in order to close up the gap. The approaches to balanced federal budget are to raise additional revenue or to cut spending.
When spending exceeds income, the result is a budget deficit, which must be financed by borrowing money and paying interest on the borrowed funds, much like an individual spending more than he can afford and carrying a balance on a credit card. A balanced budget occurs when spending equals income. The U.S. government has only had a budget surplus in a few years since 1950. The Clinton administration (1993-2001) famously cured a large budget deficit and created a surplus in the late
According to the experience of most developed countries, when monetary policies are drawn up by the central banks which maintain relatively independent with the governments, the effectiveness of monetary policies can be ensured. To ensure the independence of central banks is in order to avoid that the governments directly intervene in the monetary policies. The independence of central banks can avoid that their governments’ debt is diluted by expansion of the monetary policy. So a short-term economic stimulus leads to prices rising, and threatens long-term economic development. The correlation between central bank independence and the inflation rate in the developed and emerging countries is a positive one(FLORIN 2010).
The main point to make about the level of external debt is that it should not become too large. While there is an obvious advantage in foreign borrowing from the standpoint of a capital-poor country where the rate of return on marginal investment exceeds the world interest rate plus the country-specific risk premium, this benefit is rather modest, and easily outweighed by the macroeconomic risks of foreign indebtedness. Debt should therefore be kept sufficiently small to avoid it becoming a significant macro threat. This focus on different types of external claims on the country brings us to the second major issue, that of composition of the "debt". Here there is an obvious convenience in adopting a broad definition of "debt" that includes equity claims.
CAPM has a simplified calculation which means it’s easy to calculate the possible outcomes. It’s a diversified portfolio which means there’s no unsystematic risk. It uses the dividend discount model for the systematic risk. It uses WACC- weighted average cost of capital fot determination of the financial risk variability. Weakness of CAPM • It creates for volatility because the risk free rate is on the short term government securities.
I especially like the idea that it can be run without a central bank. Without intervention, there is less likelihood for shocks and uncertainties that are tied to it. I feel that this is important because it takes away a lot of speculative expectations when the economy is left on its own and able to self-correct. However, it is also important to note that it would require a lot of effort to change the system again. The gold standard should be left as a benchmark for what is expected of a central bank.
The central authority will seek to have the real value of its currency reflected accurately in the FX market. If it thinks this is not the case, it will intervene in the market if it feels this intervention will be effective in achieving the desired result. Comparison Between Money Market and Capital market Money market is differentiated from capital market on the basis of the following :- 1) Credit Instruments The main credit instruments of the money market are collateral loans, call money, acceptances, bills of exchange. On the other hand, the main instruments used in capital markets are shares, debentures, stocks, bonds, securities of the government. 2) Maturity Period The money market deals in borrowing and lending of short-term finance ( i.e.
Manipulation of CRR Cash Reserve Ratio is the portion of Net Demand and Time Liabilities(NDTL) that the banks have to keep in the RBI(no interest for banks) which is fixed by the RBI. The RBI has the freedom to change the CRR in accordance with economic scenario. If RBI increases CRR, the cash available with the commercial banks will correspondingly come down there by reducing inflation and vice versa. Manipulation of