Supply and Demand Term Paper
The
banker becomes the owner of the money, once the money is paid to a bank. Now it
ceases to be the money of depositor. Now the banker is free to do with that
money. He is not also answerable to the depositor if the banker put his money
into jeopardy, or hazardous speculation. However in the end the banker is
answerable to the depositor and he has to pay back a similar sum, which was
initially deposited in the bank.
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The
survival of banks depends on lending money. Naturally the money the banks lend
brings interest and this interest is the one, which keep the banks floating.
Thus lending of money gives them the incentive to offer their customers loans to
the full amount permitted by the Central Bank. As a result the bank always wants
to keep fully loaned up status. The banks also have a pressure from the Central
Bank as according to the rule the commercial banks are supposed to retain a
certain proportion of reserves. Thus to keep this reserve without fail, the
banker do all the borrowing and lending of money and at the same time the supply
and demand of money is kept in mind.
“Whatever the system, it is important that we should have the right quantity of
exchange medium, or nowadays, credit, to satisfy the needs of the economy in its
current or potential level of activity. Indeed it is by regulating the amount of
credit available that the level of economic activity can be controlled. To
expand the economy we increase loans, overdraft and credit facilities to
business and consumers. To slow down the economy we reduce the level of credit
available”
Since people are not in a position to have all the goods and services they want
so they have no choice but to choose from the available commodities. This is how
demand is created. In the same way money is never in abundance and therefore the
scarcity makes it the most demanded commodity in the world. When the supply or
demand changes, the prices send their signals and at the same time provide
incentives to prospective buyers and sellers. As a result the market prices are
adjusted according to affecting incentives.
Interest is the cost of obtaining credit. It may also be called the return paid
to owners of capital. The customers of a bank are very much interested in the
amount of interest they receive by the end of the fiscal year. There occur many
variations in the annual rate of interest. The main cause may be: Length of
loan: The longer the loan period, the greater will be the interest rate charged.
If the risk is greater for non-repayment of the loan, the greater interest rate
will be charged.
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