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The role of money in the macro economy - Assignment Example
The stock of money in an economy is regulated with a view to facilitate economic growth. This paper seeks to study the role of money in national and international monetary systems, the relevance of institutions in this context and its impact on macro economy. …
Money supply in an economy is closely linked to economic growth of the nation, unemployment, inflation in economy and interest rates prevailing in the banking system of the country. ECB (2011, p. 63) states “The volume of broad money in the economy is the result of the interaction of the banking sector (including the central bank) with the money-holding sector, consisting of households, nonfinancial corporations, the general government other than central government, as well as non-monetary financial intermediaries.” Money supply determines liquidity in the economic system and credit growth. Credit growth depends upon the liquidity in the banking system, ability of the banking system to scale up their exposure in relation to demand, interest rates, internal rate of return expected on investments and the general economic condition. Therefore credit growth is considered an important indicator of economic development in a country.
A country needs to overcome the imbalances in the current account through regulations for maintaining the exchange rate parity of its currency in the international markets for sustainable growth and development. The US subprime crisis and the European financial crisis have underlined the importance of financial services sector in macroeconomics. The globalization phenomenon necessitates revisiting of global monetary system with International Monetary Fund at the helm of affairs. Surveillance system of the International Monetary Fund should be able to detect the warning signals of impending economic crisis and support the countries in overcoming their economic imbalances. ...