Scribd Logo
Upload

Welcome to Scribd!

  • 3 Macroeconomic Terms

    Uploaded by

    Aneeq Tahir
    4 views3 pages
    1. Bank Rate refers to the interest rate charged by a central bank when commercial banks borrow capital. It is determined by central banks and influences monetary policy. The three types of Bank Rates are Primary Credit, Secondary Credit, and Seasonal Credit. 2. An Inflation Tax is the loss of purchasing power experienced due to inflation. As prices rise and money loses value, people effectively pay a tax through the higher prices. 3. Fractional Reserve Banking allows banks to lend out most deposits while keeping only a fraction in reserve. This increases the money supply but was a factor in the Great Depression when banks could not repay all depositors due to widespread bank runs. The FDIC now insures

    Original Description:

    Original Title

    3 macroeconomic terms

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    1. Bank Rate refers to the interest rate charged by a central bank when commercial banks borrow capital. It is determined by central banks and influences monetary policy. The three types of Bank Rates are Primary Credit, Secondary Credit, and Seasonal Credit. 2. An Inflation Tax is the loss of purchasing power experienced due to inflation. As prices rise and money loses value, people effectively pay a tax through the higher prices. 3. Fractional Reserve Banking allows banks to lend out most deposits while keeping only a fraction in reserve. This increases the money supply but was a factor in the Great Depression when banks could not repay all depositors due to widespread bank runs. The FDIC now insures

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    4 views3 pages

    3 Macroeconomic Terms

    Uploaded by

    Aneeq Tahir
    1. Bank Rate refers to the interest rate charged by a central bank when commercial banks borrow capital. It is determined by central banks and influences monetary policy. The three types of Bank Rates are Primary Credit, Secondary Credit, and Seasonal Credit. 2. An Inflation Tax is the loss of purchasing power experienced due to inflation. As prices rise and money loses value, people effectively pay a tax through the higher prices. 3. Fractional Reserve Banking allows banks to lend out most deposits while keeping only a fraction in reserve. This increases the money supply but was a factor in the Great Depression when banks could not repay all depositors due to widespread bank runs. The FDIC now insures

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 3

    3 macroeconomic terms

    1. Bank Rate: In a country, when a commercial bank or any other depository institution borrows

    capital from a central bank of that country, the central bank charges an interest rate. This interest

    rate is called the Bank rate (Zanzalari, 2022). Different countries have different terms for bank

    rates. For instance, the Federal Reserve, which serves as the country's central bank, has a bank

    rate known as the discount rate. Bank rates are determined by central banks. One of the

    instruments the Federal Reserve utilizes to carry out monetary policy is the discount rate. While

    a higher discount rate makes borrowing money from the Federal Reserve extra costly for banks,

    a lesser discount rate pushes banks to do so. The three types of Bank rates are Primary credit,

    Secondary credit, and Seasonal credit.

    2. Inflation Tax: The price of products and services rises due to inflation, while the currency

    loses value. In addition, an inflation tax is associated with inflation. The inflation tax is distinct

    from income tax and has no bearing on how taxes are collected. The inflation tax is a charge paid

    on one's money as the level of inflation increases. As inflation rises, money's purchasing power

    decreases. For example, a person has $500 and wants to buy a new phone. The price of the phone

    is $500. There are 2 options: buy the phone, put the money in the savings account (5% annual

    interest), and buy the phone afterward. After one year, the savings are a total of $525. But due to

    inflation, the price of the phone has now gone to $550. One might think that they have gained

    $25, but in reality, they have to pay $25 extra to buy the phone. If one had bought the phone the

    previous year, they would have saved $50. So now, they pay $25 as an ‘inflation tax’.
    3. Fractional Reserve Banking: In banking with fractional reserves, the bank is only obligated

    to keep a part of bank deposits on hand, allowing it up to lend out the remaining funds. This

    mechanism is built to continuously increase the amount of credit in the economy while

    maintaining sufficient liquidity to handle deposit withdrawals (PRITCHARD, 2022). Let's say

    one has $2,000 in their savings account. Some other client of the bank asks for a $500 loan. It

    may only utilize a portion of each customer's funds to pay for the loan. The banking crisis at the

    time of the Great Depression was extremely severe as a result of fractional-reserve banking,

    costing numerous people their entire hard-earned money.  As a result, the Federal Deposit
    Insurance Corporation (FDIC) safeguards savings in financial institutions up to a specified

    amount. There is an alternative to this, such as the Central Bank Digital Currency.

    References:

    Inflation Tax: Definition, Examples & Formula | StudySmarter. StudySmarter US. (2022).
    Retrieved 30 July 2022, from
    https://www.studysmarter.us/explanations/economics/macroeconomics/inflation-tax/.

    Zanzalari, D. (2022). Bank Rate. The Balance. Retrieved 30 July 2022, from


    https://www.thebalance.com/what-is-a-bank-rate-5199902.

    PRITCHARD, J. (2022). Fractional-Reserve Banking. The Balance. Retrieved 30 July 2022,


    from https://www.thebalance.com/what-is-fractional-reserve-banking-4590236.

    You might also like