International Accounting Determination of Currency Level

Question: Write about theInternational Accountingfor Determination of Currency Level. Answer: Determination of Currency Level by Central Bank If the economy of a nation is considered as the human body, then the central bank must be considered as the heart of the body. The central bank controls the level of money into the economy of a nation to maintain the growth and health of the nation. The manner in which the central bank controls the level of money depends on the economic power and situation of the central bank. The amounts of money that are circulating in the economy of a nation have an impact on both macro and micro economic trends. The level of money that are issued by the central bank have an impact on the car loans, personal loans and home mortgages (Gal and Gambetti 2015). The central bank controls the money through the following: Print more money As the economy is not pegged to any gold standard, the Central bank can simply increase the quantity of money by printing it. They have the ability to print the money as much as they want though there is some negative impact of this. Just printing more money has no impact on the production or output levels and the money itself becomes valueless. Further, it can lead to inflation and therefore, it is not the preferable option for the bank (Krugman 2014). Set the requirement for reserve the basic method that is used by all the central banks are to control the amount of money in the economy for the requirement of reserve. As per the rule, the central banks require the depository institutions to deposit a particular amount of money as the reserve amount against the all transaction accounts. When more money is circulated by the bank then the requirement of reserve is reduced. That means the bank is in a position to lend more amount of money. On the contrary, if it wants to reduce the level of money, it has the option of increasing the requirement of reserve and the bank will have less amount of money for the purpose of lending which in turn, will increase the rate of interest (Lee 2014). Influence the rate of interest in most the instances the central bank directly cannot set the rate of interest for the loans like car loans, mortgage loans and personal loans. However, in certain manner they can push the rate of interest to the level of desire. For instance, they can set the rate through setting the borrowing rates of commercial banks from the central bank. The rate at which the commercial banks can borrow the loan from central bank will have direct impact on their lending rate and thereby will control the amount of money that is circulated in the economy (McKinnon and Schnabl 2014). Engage in the operation of open market central bank can influence the amount of money through selling or buying the government securities by engaging in the operation of open market. When the bank wants to increase the amount of money, it buys the government securities from the commercial banks. These make the asset of the bank free as they now have more amount to lend and the vice versa is done when the bank intends to reduce the level of money in the economy. Introduce the Quantitative Easing Programme under the programme of Quantitative easing, the Central bank can generate money and utilise it to purchase the securities and assets like government bonds. This money will enter the banking system as the money is received as the payment for the assets that are bought by central bank. In turn, the reserves of the bank will enhance and that will encourage the bank to lend more money, which in turn, will reduce the rate of long-term interest and will encourage for investment. Actions taken by Central Bank of Australia The central bank tries its best to maintain a healthy economy. The way in which it does this is through controlling the quantity of money in circulation. This is done through influencing the rate of interest, setting-up the requirements of reserve and engaging itself into the operation of open market. For assuring the sustainable and healthy economy, it is important to have the control on the right amount of money under circulation (Del Negro and Sims 2015). Although the experts are predicting that Reserve Bank will keep their interest rate on hold, there is a possibility on the hike of the rate. The official cash rate of the RBA has been put on hold at the rate of 1.50% as it dropped at lowest during August 2016. The RBA utilises it as the instrument for the monetary policy, and will increase the cash rate through the operation in financial market (Burnside, Eichenbaum and Rebelo 2016). Impact on Stock Market Falling of interest rate does not have any direct impact on the stock market, it just change the psychology of the people. When the interest rate falls, the people starts spending more and this will enhance the earnings and thereby the stock price will rise and the market jumps with happiness. Therefore, though the relationship among the stock market and interest rate is indirect, they have a tendency to move in opposite directions (Asekome and Agbonkhese 2015). Impact on House Prices and Investor Loan When the interest rates are low, more people will be able to afford building and thereby will increase the jobs related to construction. This is the ideal outcome for the RBA when they are reducing the rates. Further, the reduced rates not only enable the people to borrow more, it will assist the people to renovate their existing houses. Moreover, the lower rate of interest will make the debt more attractive and influence them to invest more as the repayment of the amount becomes smaller. The reduced rate of interest will force the people to look for non-cash investments. These non-cash investments include share market, housing market and investment property (Ali, Barrdear, Clews and Southgate 2014). Reference Ali, R., Barrdear, J., Clews, R. and Southgate, J., 2014. The economics of digital currencies. Asekome, M.O. and Agbonkhese, A.O., 2015. Macroeconomic Variables, Stock Market Bubble, Meltdown and Recovery: Evidence from Nigeria.Journal of Finance,3(2), pp.25-34. Burnside, C., Eichenbaum, M. and Rebelo, S., 2016. Currency crises models. InBanking Crises(pp. 79-83). Palgrave Macmillan UK. Del Negro, M. and Sims, C.A., 2015. When does a central bank? s balance sheet require fiscal support?.Journal of Monetary Economics,73, pp.1-19. Gal, J. and Gambetti, L., 2015. The effects of monetary policy on stock market bubbles: Some evidence.American Economic Journal: Macroeconomics,7(1), pp.233-257. Krugman, P., 2014. Currency regimes, capital flows, and crises.IMF Economic Review,62(4), pp.470-493. Lee, J.W., 2014. Will the Renminbi Emerge as an International Reserve Currency?.The World Economy,37(1), pp.42-62. McKinnon, R. and Schnabl, G., 2014. China's exchange rate and financial repression: The conflicted emergence of the RMB as an international currency.China World Economy,22(3), pp.1-35.