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MACRO ECONOMICS ASSIGNMENT NO 02 RASHID GHANI SOOMRO 6056 SIR RAGIB ZAFAR

Money, Banking & the Federal Reserve


What is FED? How its Work? The Federal Reserve System also known as the Fed. Fed is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907.Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved. Events such as the Great Depression were major factors leading to changes in the system. The Federal Reserve does not make any direct loans to the government. That would be too much like the government printing money to pay for expenses. However, the Fed does buy T-Bills on the open market. Let's review how the whole system works. When the Fed wants to increase the money supply, it buys T-Bills on the open market from the public The Fed does indeed collect interest on those T-Bills. However, the law says that all income after expenses must be turned over to the Treasury. So about 90%+ of the interest paid to the Fed is returned. The federal government then puts the money into circulation as its official currency. What is Barter System? Barter System is that system in which goods are exchanged for goods. In ancient times when money was not invented trade as a whole was on barter system. Define Money? Money is any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another. Metal coins first emerge from 7th century BC. What is the concept of Bit? In 1536 Spanish made a Mexico City, start the first coin made in the New York. It was often divided into 8 pieces for smaller transactions. One quarter of the coin being 2bits How these coins are converted into paper currency? Following are the advantages of paper money over coins thats why paper money came into existence: It reduced transport of gold and silver, lowered the risks; it made loaning gold or silver at interest easier, since the specie (gold or silver) never left the possession of the lender until someone else redeemed the note; It allowed for a division of currency into credit and specie backed forms.

It enabled the sale of stock in joint stock companies, and the redemption of those shares in paper.

Name the person who opposed the central Banking system? Thomas Jefferson Gold standard introduced in 1834 year. What is the role of ICC? ICC is the largest, most representative business organization in the world Business organization aims to promoting open international trade and investment systems and the market economy The ICCs policy areas today include among others anti corruption arbitration competition environment and energy business in society and e business To exchange good practices between enterprises at sector level and with other stakeholders It was not the case that it was going to protect consumers or shippers. In fact consumers were hurt because ultimately with higher railroad rates, they were forced to pay higher prices for the goods and services that were shipped across the country. Name the two who support the central banking system and provide few details of these two person? J P Morgan & John d- Rockefeller (April 17, 1837 March 31, 1913) was an American financier, banker and art collector who dominated corporate finance and industrial consolidation during his time. And the John Davison Rockefeller (July 8, 1839 May 23, 1937) was an American oil industrialist investor, and philanthropist. He was the founder of the Standard Oil Company Define the impact of sole and purchases of government securities by FED loan monetary system? Central banks such as the Federal Reserve in the United States enact monetary policy to ensure stability in the economy, especially its price system and rate of growth. Most discussions of monetary policy focus on its effects on the overall economy rather than on particular economic sectors. Because of a central bank's use of interest rates and the money supply to affect the economy, monetary policy exerts significant effects on the operations of banks and other depository institutions What is the Discount rate in banking channel The discount rate is an interest rate a Central Bank charges depository institutions that borrow reserves from it. Discount rate is calculated on the basis of future cash flow.

What is the reserve equipment? Provide background of reserve requirement and why it is introduced? A type of account on a municipality's or company's balance sheet that is reserved for long-term capital investment projects or any other large and anticipated expense that will be incurred in the future. Reserve requirement is a central bank regulation that sets the minimum reserves each commercial bank must hold rather than lend out of customer deposits and notes. It is normally in the form of cash stored physically in a bank its introduced because When central bank changes the percentage reserve requirement for controlling the volume of credit, it has an immediate impact on the deposits and credit of all member banks. And effect of change in the reserve requirement is equally felt by all the member banks What are the impacts of decreasing and increasing interest rate? As a consumer, it is important that you understand the dynamics of interest rate fluctuations. That's because the effects of rates rising or falling can impact everything from your mortgage payments to your investments

How great depression begun? What are the reasons behind that in 1929 and what are its consequences? The Great Depression represents one of the darkest periods in American economic history. Most people think the Great Depression started in October 1929, with the famous Black Tuesday stock market crash, but economists and historians point to an economic downturn At its highest point during the Great Depression, unemployment reached 25% (in 1933). The Great Depression began in 1929 and ended in 1941 when America prepared to enter World War II. Fall in the prices of Agriculture Textile manufacturing was declined. The prices of cotton &other agricultural goods were decreased due to the postwar policies. Cotton was exported to different countries.

What is the concept of insurance of deposits? Why it was introduced? Concept of insurance of deposits is to promote stability in the banking system during the Great Depression. Prior to the creation of deposit insurance, many banks experienced large outflows of deposits by panicked depositors, which caused many bank failures it was introduced because Protection provided usually by a government agency to depositors against risk of loss arising from failure of a bank or other depository institution.

Who, when and why started the FED audit? In 1993 The head of the House Banking Committee, Rep. Henry Gonzales from Texas, called for an independent audit of the Fed's operations; he wanted the proceedings of the Open Market Committee videotaped, with detailed minutes released within a week instead of vague summaries issued several weeks later. Gonzales also proposed that the president chooses the twelve heads of the Fed's regional banks instead of powerful bankers. How would you compare these fed banking and economic system with the current banking and economic system of Pakistan? Pakistan, an impoverished and underdeveloped country, has suffered from decades of internal political disputes and low levels of foreign investment. In growth and in investment we lost investor because of global economic situation external demand for its exports and decline in availability of external capital to finance or invest in growth process of the country.According to global financial crisis was Felton market and investor confidence in many developing countries, including Pakistan, as banking systems and asset markets came under stress. In spite of structural shift towards industrialization, agriculture sector is still the largest sector of the economy with deep impact on socio-economic set up. The manufacturing being the second largest sector of the economy bears significant importance and created the dangers of an intensified financial crisis, high rates of inflation, unemployment and food shortages. The direction in which Pakistans economy moves at this crossroads, depends upon the speed with which changes are brought about in the policy environment and in the institutional structure of both Unless these constraints are addressed urgently and within a long term perspective Pakistans economy could face such a severe unemployment, shortage of key commodities and inflation that the present social tensions could reach a flash point. Write down the story of money as debt in your own words? Money is anything that is generally accepted as a medium of exchange and that neither governments nor the vast majority of people have money. Governments, whether liberal, socialist, conservative, democratic, whatever you may call them, do not have money. They are taxing us to death and yet they are making debts. And most of them are already so deeply in debt that there seems to be hardly a hope to pay off what was borrowed. A sizeable percentage of all taxes collected, different from country to country but in every case considerable, goes towards "debt service" that is what the government calls the paying of interest on its debt before even discussing the "budget", which really is only about how to spend the rest. thus not only obligating the public to the money-issuing private banks but also creating an endless and selfescalating debt that is to eventually outgrow all other forms of wealth generation when money is created, it is created in the form of credit for the banks, and is issued in the form of debit

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