Trade Finance Paper

INTL 303

Individual Assignment

Piu Pooja Jany Palma

Student ID: 300638818

Date: 22 March/ 2016

Banks play an important role in the financial markets. Central banks throughout the world are the most important among them because they are the government establishments who are in charge of monetary policy. Central banks actions affect interest rates, the amount of credit, and the money supply, all of which have direct impacts on financial markets as well as on aggregate demand and inflation. Well-functioning banking system in a country can lead its economy to success. Central banks play an important part on developing and managing a country’s economic development. There are many other reasons which explain why banks are important for financial markets and economy. Therefore, it is important to understand how banks work, who controls central banks, and determines their actions. As well, it’s necessary to know how central banks around the world act and manage money supply in the economy, reduce risks of doing business using various tools in different types of market.

1. Why are banks so crucial to the well- functioning financial markets?

Answer: Financial intermediaries can move funds by getting reserves from the bank savers and after that utilizing these assets to make advances to borrower-spenders through financial intermediation process. They play an important role in improving economic productivity. An economy can only reach to its full potential when it has a well- functioning set of financial intermediaries. Also, banks play a key role in the economy because they deliver liquidity services, endorse risk sharing, and resolve information problems.

Following are the details of why banks are crucial to the well- functioning financial markets.

* Transaction costs: Transaction costs include the time and money spent in carrying out financial transactions. These costs are main problem for people with excess funds. In this case,...