ECO-501_karishma_shrestha MBA 1st sem

ASSIGNMENT COVER PAGE

S. N Student’s Name Student’s ID

1 Karishma Shrestha 2031158

Lecturer Name : Dr. Krishna Acharya

Subject Code & Title : ECO501- Business Economics
Semester : First Semester

Assignment Topic : Home Based Mid-Term Assessment(20%)

SUBMISSION DATE: 13th July 2020 (before 5:00 pm)

ATTENTION:
1) 1 day late from the date of submission - 25% will be deducted.
2 days late from the date of submission - 50% will be deducted.
More than 2 days late from the date of submission - “0”grade will be awarded
Plagiarism - The University will not tolerate cheating, or assisting others to cheat, and
views cheating in coursework as serious academic offence. The work that a student
submits for grading must be the student’s own work, reflecting his or her learning. Where
work from other
sources is used, it must be properly acknowledged and referenced.

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Table of Contents

1. Introduction............................................................................................................................1

I. Illustrated the condition of financial sector of Nepal?.......................................................2

II. Explain the change in the status of bank and financial sector that mentioned in this
case?.........………………………………………………………………………………………...2

III. What is GDP and discuss the role of financial sector on the GDP of Nepal?.................3

IV. What are the monetary variables and what were the goals imposed by government of
Nepal?.............................................................................................................................................5

V. What is money supply and how it affects financial sector of Nepal?.............................6

VI. Illustrated the name of monetary variables....................................................................8

VII. What may be the best title of this case study?.................................................................9

Conclusion........................................................................................................................10

References..........................................................................................................................11

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1. Introduction
GDP stands for Gross Domestic Product. It is the monetary value of all finished goods and
services produced within a country in a year .It can be calculated in three ways, using
expenditures, production or incomes .It can be adjusted for inflation and population to provide
deeper insights. It basically provides an economic snapshot of a country ,used to estimate the
size of an economy and growth rate. GDP is a main framework to mentor policymakers,
investors and business in strategic decision making.

Monetary policy is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy used by
the government of a country to achieve macroeconomic objectives like inflation, consumption,
growth, and liquidity. Monetary variable is the policy adopted by monetary authority of a
country that controls either the interest rate payable on  the money supply. The case given here
shows the condition of financial sector of Nepal and explained thoroughly.

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I. Illustrated the condition of financial sector of Nepal?

Ans: The above case study comprehends the money supply policy, stock of money in the
economy at certain point of time to limit average consumer price inflation and maintain foreign
exchanges reserves sufficient enough to import goods and services and also contribute to the
stability of gross domestic product to achieve and maintain low unemployment and to maintain
predictable exchange rates with other currencies

Till the mid-April of FY 2018/19, financial transaction has been expanded significantly along
with the enhancement in financial sector accessibility. More number of financial institutions
have come together in operation consisting of hefty shares in both total assets and liabilities.
Thus , in FY 2018/19, 170.1 % of GDP is achieved. Moreover, In mid -march 2019, The Merger
and Acquisition Policy has come into existence to achieve financial stability through financial
strengthening. During the last few years, financial deepening indicators like broad money supply,
private sector credit and total deposit to GDP ratio have been improving. Financial access and
monetization of economy have been increased.

II. Explain the change in the status of bank and financial sector that
mentioned in this case?

Ans: The change in the status of bank and financial sector that mentioned in this case are
explained below:

 Till the mid-March of FY 2017/18, broad and narrow money supply have been increased by
9.1 % and 6.4 % respectively.
 Up to mid-March of FY 2018/19, there has been reduction in net foreign assets; as a result,
there has been contraction in money supply in comparison to FY 2017/18.  A fall
in supply of money leads to an increase in rate of interest (the price of money).
 Monetary policy of FY 2018/19 has aimed to limit annual average consumer price inflation
within 6.5 % and it has been 4.2 % up to the mid-March 2019.
 Till the mid-April of FY 2018/19, financial transaction has been expanded significantly along
with the enhancement in financial sector accessibility. More number of financial institutions

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have come together in operation consisting of hefty shares in both total assets and liabilities.
Thus , in FY 2018/19 170.1 % of GDP is achieved. During the last few years, financial
deepening indicators like broad money supply, private sector credit and total deposit to GDP
ratio have been improving. Financial access and monetization of economy have been
increased
 In mid-March 2019, the share of liquid asset in the total deposit of bank and financial
institutions is 22.56 %, the share of cash and cash reserve is 10.35 % of total deposit, and the
share of total credit to the total cash reserve and core capital is 80.57 %. In comparison to
risk weighted assets, the ratio of core capital and total capital is 12.62 % and 13.9 3 %
respectively.

The supply of money in the economy mostly affects the interest rate and the price level. If money
supply is more than demand, the economy is likely to be overheated and inflationary pressure is
likely to be created. On the other hand, if money supply is deficient, interest rate goes up
discouraging the economic activities like production and consumption. It is thus necessary that
the monetary authority uses appropriate policies to keep the supply of money at desirable level.

III. What is GDP and discuss the role of financial sector on the GDP of
Nepal?
Ans: GDP stands for Gross Domestic Product. It is the monetary value of all finished goods and
services produced within a country in a year .It can be calculated in three ways, using
expenditures, production or incomes .It can be adjusted for inflation and population to provide
deeper insights. It basically provides an economic snapshot of a country ,used to estimate the
size of an economy and growth rate. GDP is a main framework to mentor policymakers,
investors and business in strategic decision making.

The GDP of a country tends to increase when the total market value of goods and services that
domestic producers sell to foreign countries exceeds the total value of foreign goods and services
that domestic consumers buy. Thus, can be called trade surplus. If the opposite situation occurs

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where domestic consumers spend more on foreign products than the total sum of what domestic
producers can sell to foreign consumers .It is called trade deficit. Hence, GDP decreases.

Roles of Financial sector on GDP of Nepal

There are several reports and studies pointing that the financial sector’s development is a keyway
to foster economic growth. Banks and financial institution sector contribute to the GDP of a
country .The recent report showed that in the last fiscal year of 2075/76 A-class Commercial
Banks earned a total of 65 arba. The profit earned by 28 commercial banks is 18% of the entire
GDP of Nepal. There are other various roles which financial sector like bank contributes to
economy which are enlisted below:

1. Circulation of money: The idle funds which individual holds is collected by bank which in
return will grant to others as “lending” who carries out several activities within a nation.

2. Facilitate in promotion of productive sector: Lending of loans for agriculture or other

renewable resources like hydropower etc.

3. Provoke Entrepreneurship: Government banks are coming up with impressive schemes to

promote entrepreneurship.

4. Foreign trade: Banks are the only authorized space from where foreign trade transactions
are carried out.

5. Acts as a mediator: For any short of trading , be it stock or remittances financial sector is
mediator .Those funds aid to contribute and increase to GDP.

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IV. What are the monetary variables and what were the goals imposed by
government of Nepal?

Ans: Monetary variables is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy used by
the government of a country to achieve macroeconomic objectives like inflation, consumption,
growth, and liquidity. Monetary variable is the policy adopted by monetary authority of a
country that controls either the interest rate payable on  the money supply. Further goals of a
monetary variables are usually to contribute to the stability of gross domestic product to achieve
and maintain low unemployment and to maintain predictable exchange rates with
other currencies.

The monetary variables include the following points :

 Open Market Operation

An open market operation is an activity by a central bank to give liquidity in its currency to a
bank or a group of banks. The central bank can either buy or sell government bonds in the
open market. The usual aim of open market operations is—aside from supplying commercial
banks with liquidity and sometimes taking surplus liquidity from commercial banks—to
manipulate the short-term interest rate and the supply of base money in an economy, and thus
indirectly control the total money supply, in effect expanding money or contracting the
money supply.
 Bank rate policy
A monetary variable that lowers interest rates and stimulates borrowing is known as
an expansionary monetary variable. An expansionary variable maintains short-term interest
rates at a lower than usual rate or increases the total supply of money in the economy more
rapidly than usual.

 Cash Reserve Ratio ( CRR)

It is a specified minimum fraction of the total deposits of customers, which commercial
banks must hold as reserves either in cash or as deposits with the central bank. CRR is set

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according to the guidelines of the central bank of a country. Through a cash reserve ratio, the
central bank can change money supply in the economy. Such as, when the economy demands
a Contractionary Monetary Policy the central bank will raise the CRR. On the other hand,
when the economic conditions, demand for an Expansionary Monetary Policy the central
bank cuts down the CRR.

There are many goals imposed by government of Nepal. Some of them are as follows:

 Full employment
It implies, the macroeconomy is operating at its full capacity and there is no output gap or
demand deficient unemployment. In the case of fiscal policy, we argue for such a policy
that is geared towards achieving a high level of economy activity and low unemployment.
It is traditionally used to try to combat unemployment in a recession by lowering interest
rate in the hope that less expensive credit will entice businesses into expanding

 Enhance financial stability

Financial stability is essential for the conduct of monetary policy. This is because financial
instabilities can curtail economic growth, as in the classic cases of bank panics. Likewise, it
can also impede the effectiveness of monetary transmission. An economy can reach price
stability when the supply of money in an economy equals the demand for it. Increases in
money supply tend to decrease interest rates and help to control deflation by providing
upward pressure on prices.

 Price Stability
It is one of the primary goals of monetary variables. An economy can reach price
stability when the supply of money in an economy equals the demand for it. Increases
in money supply tend to decrease interest rates and help to control deflation by providing
upward pressure on prices.

V. What is money supply and how it affects financial sector of Nepal?

Ans: The money supply is all the currency and other liquid instruments in a country's economy
on the date measured. The money supply roughly includes both cash and deposits that can be
used almost as easily as cash.
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Valuation and analysis of the money supply help the economist and policy makers to frame the
policy or to alter the existing policy of increasing or reducing the supply of money. The
valuation is important as it ultimately affects the business cycle and thereby affects the economy.

Money supply in an economy clearly depends on two broad factors: money multiplier and
reserve money. They are called the immediate determinants of money supply.

Money multiplier

It is one of the determinants of money supply. There is a positive and proportionate relationship
between money supply and money multiplier i.e. higher the value of money multiplier, higher
will be the money supply, given the monetary base. The value of money multiplier depends on
the four behavioral ratios: c, r, t and e. The later ratios show the behavior of non-bank public and
BFIs and the central bank. Thus, it is often argued that money supply is determined by the joint
behavior of public, BFIs and the central bank. In this sense, money supply is not a complete
exogenous variable or policy determined variable but partly an endogenous variable as well.

Reserve Money
Reserve money is the monetary liabilities of the central bank. It is the combination of currency
held by the non-bank public, cash in hand of commercial banks, and their deposits with central
banks.

Basically, there are two determinants of reserve money: net foreign assets (NFA) and the net
domestic assets (NDA) of the central bank (or monetary authorities).

It follows from the discussion that money supply is not totally fixed by the central bank as
assumed by the classical economic models. Rather, it is determined by the joint interaction of the
central bank, commercial banks, and the public. Furthermore, money supply is broadly
determined by money multiplier and the monetary base. While money multiplier remains more
or less stable over time, it is the changes in the reserve money that are largely responsible for
bringing changes in money supply. This argument is true in case of Nepal. The money supply in
Nepalese economy is broadly determined by the exogenous factors in the monetary base.

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VI. Illustrated the name of monetary variables.

Ans: The primary objective of monetary policy is to reach and maintain a low and stable
inflation rate, and to achieve a long-term GDP growth trend. This is the only way to achieve
sustained growth rates that will generate employment and improve the population's quality of
life.

The monetary variables include the following names :

 Bank rate policy
A monetary variable that lowers interest rates and stimulates borrowing is known as
an expansionary monetary variable. An expansionary variable maintains short-term interest
rates at a lower than usual rate or increases the total supply of money in the economy more
rapidly than usual.

 Open Market Operation

An open market operation is an activity by a central bank to give liquidity in its currency to a
bank or a group of banks. The central bank can either buy or sell government bonds in the
open market. The usual aim of open market operations is—aside from supplying commercial
banks with liquidity and sometimes taking surplus liquidity from commercial banks—to
manipulate the short-term interest rate and the supply of base money in an economy, and thus
indirectly control the total money supply, in effect expanding money or contracting the
money supply.

 Cash Reserve Ratio ( CRR)

It is a specified minimum fraction of the total deposits of customers, which commercial
banks must hold as reserves either in cash or as deposits with the central bank. CRR is set
according to the guidelines of the central bank of a country. Through a cash reserve ratio, the
central bank can change money supply in the economy. Such as, when the economy demands
a Contractionary Monetary Policy the central bank will raise the CRR. On the other hand,
when the economic conditions, demand for an Expansionary Monetary Policy the central
bank cuts down the CRR.

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VII. What may be the best title of this case study?

Ans: The best title of this case study is “ Monetary supply of financial sector ”.

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Conclusion

The primary objective of monetary policy is to reach and maintain a low and stable inflation rate,
and to achieve a long-term GDP growth trend. This is the only way to achieve
sustained growth rates that will generate employment and improve the population's quality of
life. It follows from the discussion that money supply is not totally fixed by the central bank as
assumed by the classical economic models. Rather, it is determined by the joint interaction of the
central bank, commercial banks, and the public. Furthermore, money supply is broadly
determined by money multiplier and the monetary base. While money multiplier remains more
or less stable over time, it is the changes in the reserve money that are largely responsible for
bringing changes in money supply. This argument is true in case of Nepal. The money supply in
Nepalese economy is broadly determined by the exogenous factors in the monetary base.

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References

https://siddhabhatta.blogspot.com/2019/07/money-supply-definition-factors.html
https://www.quora.com/What-is-a-contraction-of-a-money-supply
https://www.youtube.com/watch?v=kXgtYlhzQFU

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