Money, Banking, and Fiscal Policy
Money facilitates exchange, stores value, and serves as a unit of account. Banking intermediates between savers and borrowers. Monetary and fiscal policies manage the economy's overall health.
Functions of Money
Money serves as a medium of exchange (eliminates barter), store of value (save for future), unit of account (price measurement), and standard of deferred payment (credit). Modern money includes cash, bank deposits, and digital currencies.
Banking System
Commercial banks accept deposits, make loans, and provide payment services. They create money through fractional reserve banking. Central banks (Nepal Rastra Bank) regulate the banking system, control money supply, and act as lender of last resort.
Monetary Policy
Monetary policy controls money supply and interest rates. Tools: open market operations (buying/selling government securities), reserve requirements, discount rate, and policy rate. Expansionary policy stimulates the economy; contractionary policy controls inflation.
Inflation
Inflation is a sustained increase in the general price level. Causes: demand-pull (excess demand) and cost-push (rising production costs). Measured by Consumer Price Index (CPI). Moderate inflation is normal; hyperinflation is destructive. Central banks target inflation rates.
Fiscal Policy
Fiscal policy uses government spending and taxation to influence the economy. Expansionary: increase spending or cut taxes to stimulate growth. Contractionary: reduce spending or raise taxes to control inflation. Budget deficits and national debt are trade-offs.
Taxation
Taxes fund government services. Types: income tax (progressive in Nepal), VAT (13% in Nepal), customs duties, excise tax, and property tax. Tax policy balances revenue generation, economic efficiency, and equity.
Summary
Money, banking, and policy tools form the macroeconomic framework. Understanding monetary and fiscal policy, inflation, and taxation is essential for analysing economic conditions and business decisions.