Central Bank

Central bank A central bank, reserve bank, or monetary authority is the entity responsible for the monetary policy of a country or of a group of member states. It is a bank that can lend to other banks in times of need. Its primary responsibility is to maintain the stability of the national currency and money supply, but more active duties include controlling subsidized-loan interest rates, and acting as a lender of last resort to the banking sector during times of financial crisis (private banks often being integral to the national financial system). It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently. Most richer countries today have an "independent" central bank, that is, one which operates under rules designed to prevent political interference. For example, the Reserve Bank of India is publicly owned and directly governed by the Indian government. Another example is the United States Federal Reserve, which is a quasipublic corporation. The major difference is that government owned central banks do not charge the taxpayers interest on the national currency, whereas privately owned central banks do charge interest. Central bank is a general name given to a nation's chief monetary authority. Central banks are responsible for a wide range of economic decisions. These may vary from ensuring currency stability, maintaining a low inflationary rate to assisting in full and gainful employment. A number of central banks also issue currency for their specific countries. The commercial entity function as the government's bank, supervise commercial banks, handle exchange reserves and modulate the credit system. Central banks also perform the crucial role as lender of last resort. Prominent examples of central banks include Reserve Bank of India (RBI) and the United States Federal Reserve System.

Open economy An open economy is an economy in which people, including businesses, can trade in goods and services with other people and businesses in the international community at large. This contrasts with a closed economy in which international trade cannot take place. The act of selling goods or services to a foreign country is called exporting. The act of buying goods or services from a foreign country is called importing. Together exporting and importing are collectively called international trade. There are a number of advantages for citizens of a country with an open economy. One primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose from. As well consumers have an opportunity to invest their savings outside of the country. In an open economy, a country's spending in any given year need not to equal its output of goods and services. A country can spend more money than it produces by

borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners. In an open economy people are allowed to trade their goods and services with other economies. This is held in contrast to closed economies in which international trade is not allowed. Openness of a country’s economy is adjudicated through a fraction of gross domestic product that measures its imports and exports, which are the determinants of international trade. An open economy offers, inter alia the consumers a choice from a larger variety of goods and services from foreign countries along with their domestic products. Along with this, economy also offers consumers the opportunity to invest outside domestic economy. The basic model used to determine GDP in a closed economy is also used to determine that in an open economy although two new aspects of imports and exports are added to it.

Open market operations It is the activity of buying and selling of government securities in the open market. Open market operations are done in order to contract or expand the quantum of money in the banking system. The purchase of securities put in money into the banking system. Selling of securities withdraws the money. Open market operations form one of the major anchors of monetary policy. Through open market operations, a central bank influences the money supply in an economy directly. Each time it buys securities, exchanging money for the security, it raises the money supply. Conversely, selling of securities lowers the money supply. Buying of securities thus amounts to printing new money while lowering supply of the specific security. The main open market operations are: •

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Temporary lending of money for collateral securities ("Reverse Operations" or "repurchase operations", otherwise known as the "repo" market). These operations are carried out on a regular basis, where fixed maturity loans (of 1 week and 1 month for the ECB) are auctioned off. Buying or selling securities ("direct operations") on ad-hoc basis. Foreign exchange operations such as forex swaps.

All of these interventions can also influence the foreign exchange market and thus the exchange rate. For example the People's Bank of China and the Bank of Japan have on occasion bought several hundred billions of U.S. Treasuries, presumably in order to stop the decline of the U.S. dollar versus the renminbi and the yen.

Market economy A market economy (also known as a free market economy or free economy) is an arrangement of resource allocation that is founded solely on the interplay of market forces like demand and supply. A market economy is a social system based on the division of labor in which the prices of goods and services are determined in a free price system set by supply and demand. This is often contrasted with a planned economy, in which a central government determines the price of goods and services using a fixed price system. Market economies are contrasted with mixed economy where the price system is not entirely free but under some government control that is not extensive enough to constitute a planned economy. In the real world, market economies do not exist in pure form, as societies and governments regulate them to varying degrees rather than allow self-regulation by market forces. The term free-market economy is sometimes used synonymously with market economy, but, as Ludwig Erhard once pointed out, this does not preclude an economy from having socialist attributes opposed to a laissez-faire system. Economist Ludwig von Mises also pointed out that a market economy is still a market economy even if the government intervenes in pricing. Based on the principles and mechanisms of a market economy several models were developed to understand and analyse the economic system. There is no intervention of any superior power, including the government, in the activities of any economic market. A market economy is judged by certain criteria. Any economic structure can be regarded as a market economy by judging certain features like convertibility of domestic currencies to foreign currencies, wages in foreign country terms, enablement of joint ventures and investment, and government control and ownerships. [1]

Features Market economies have distinctive features. They are decentralized, supple, realistic, and unpredictable in nature. They are not managed by a central actor such as a government ministry. The economist Adam Smith described market forces as the “invisible hand” that guides a market economy. According to Smith this “invisible hand” is responsible for the production of goods and services, and their pricing, in a market economy.

Consumer freedom Though a market economy is said to be practical, the elementary theory of individual freedom also plays a major role. In a market economy a consumer enjoys the privilege of choosing among competitive products and services. A producer has the freedom to expand or start a business on the condition that the rewards and risks both are borne by him, or shared with investors. A worker can choose a job according to his choice; can join any union or organization as permitted by law or change employer according to his choice.

Emerging market economy An emerging market economy is a specific country's economy that is in a early or developmental stage, but is growing rapidly. This type of economy is characterized by the presence of liquidity in local equity and debt markets. A regulatory body and market exchange mechanism are usually present. Countries with emerging market economies experience faster economic growth compared to their developed country counterparts. Investors with a greater risk appetite tend to prefer investing in emerging economies. These countries generally have domestic infrastructure problems and currency volatility. The problem of limited equity opportunities may also be present. [5]

Laissez-faire An economic notion that a country's economic arrangement should be guided by free market forces, and not by intervention of government, at its most extreme is called a laissez-faire economy.