Finance is the buying and selling of goods or services. Its operation depends on the power of money.
Money is created when it is converted from its physical form, money, into a paper or metallic form. This process is called circulation. As the term implies, it refers to the movement of money from one person to another. Therefore, if you want to buy something, you have to go to the bank and give him money. In exchange, he will give you a receipt.
The process of circulation of money was very simple, even before there were banks. Money was coined by printing it in large quantities.
When the demand for money increased, people would exchange it for goods. Therefore, the demand for the business of banking in the economy.
The money supply is the amount of money that is available in the economy. This supply of money is usually termed as stock and also referred to as banknotes. The total quantity of money circulating is known as reserves and also referred to as coins.
In the United States, the value of the dollar is always higher than the value of a dollar note. If the amount of dollars in circulation is increasing, the demand for more dollars will result in an increase in the demand for money supply.
However, some sectors of the economy may lack sufficient liquid assets. A bankrupt bank account is a good example of this. With a shortage of liquidity, banks may be reluctant to extend credit.
In such cases, it will be the role of the central bank to provide the necessary money for the banks to meet their demands. The governments of most countries use their monetary policy to determine the rate of interest.
The central bank, usually the Bank of England, is the leader of the monetary system. The role of the central bank is to provide the money when the banks run out of reserves. The central bank also keeps an eye on the economy to see that the supply of money remains stable.
In addition, the central bank plays the role of a lender of last resort and offers credit when other institutions are slow to lend. Without the central bank, there would be a huge demand for money and thus the problem of unemployment.
When it comes to finance, the central bank plays the role of lender of last resort. The money supply controls the demand for money and inflation. By having a secure supply of money, it means that inflation is controlled.