The paper 'The UK Banking System' is a great example of a Macro and Microeconomics Assignment. It can be ascertained that the Banking System in the United Kingdom has got the capability of endogenously supplying money through reliance on the liabilities so as to satisfy either an increase or even a decrease in the loan demand, which could also accommodate growth, or a decline in the economic activity (Arnon, 2010; Bordo, et al, 2009). Despite that, numerous banking firms are actually limited towards this response by the willingness of the investors to not only acquire but also hold their own liabilities (Grossman, 2010; Rogers et al. , 2009).
For Instance, the Bank of England, which is the United Kingdom’ s Central Bank is one of the 8 banks which are authorized in issuing of the UK Banknotes has actually initiated responsibility for the management of its monetary policy (Great Britain, 2005). How the Bank of England could assist in such a type of response through changing the elasticity of money supply over the course of a business cycle In order to increase the amount of money that is in circulation, the bank of England must use utilize an “ expansionary open market operation” through which it buys the short term Treasury Bills (Mellyn, 2009; Bordo, et al, 2009).
For instance, if the Bank of England will wish to ensure that the monetary policies are tightened, then it is quite definite that it will have to use a “ Contradictionary Open Market Operation” (Cooper, 2008; Singleton, 2010). The Bank will, therefore, have to sell Treasury Bills, which have been newly issued on the behalf of the “ Treasury” through the debt management agency.
Due to the use of open market operations, the public will hold less money while the Treasury holds more bills (Philippovich, 2009; Poor, 2009). Quantitative Easing (QE) Quantitative easing refers to injecting money into the economy. For instance, if the interest rates of the Bank of England are very low while the Monetary Policy Committee of the bank expects the inflation to fall below the government’ s target of 2%, it can directly inject the money into the economy in order to boost spending. The Bank of England, therefore, creates new money electronically in order in order to buy financial assets like for instance government bonds.
This cash injection does not only lower the cost of borrowing but also boosts the asset prices in order to both support spending and also get inflation back to the targets. When inflation seems to be too high, the Bank of England can then eventually sell the assets in order to reduce or minimize the amount of money and spending in the country’ s economy. The Monetary Policy Committee thus continues to set the rates of interest monthly and the monetary policy objective remains unchanged so as to meet the government’ s inflation target of 2%.
It should be known by all and sundry that Quantitative Easing was first put to use in the United Kingdom in March 2009. The Bank of England could also come up with a monetary policy through which its monetary policy will control the supply of the money through targeting a rate of interest that is aimed at promoting the country's economic growth and stability. The monetary policy that can be adopted by the Bank of England could be either contractionary or expansionary (Turner, 2011; Bordo, et al, 2009).
While an expansionary policy is aimed at increasing the total money supply in the nation’ s economy “ more rapidly than usual” , contractionary policy, on the other hand, is known to expand the supply of money more “ slowly than usual” and it can even shrink it (Bagehot, 2009; Rogers et al. , 2009).
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