Theory question 111
Financial Institutions(a) Distinguish between cash ratio and special deposits.
(b) Explain how cash ratio and special deposits are used as instruments of monetary policy.
(c) Describe any two instruments of fiscal policy in West Africa.
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(a) Cash ratio is the proportion of a commercial bank's total deposits that it must keep as cash (in its vaults or with the central bank). Special deposits are extra amounts the central bank orders commercial banks to deposit with it, which cannot be used for lending.
(b) To reduce money supply (fight inflation) the central bank raises the cash ratio or calls for special deposits, reducing the funds banks can lend and their ability to create credit; to expand money supply it lowers the cash ratio or releases special deposits.
(c) Any two: taxation – raising or lowering taxes to reduce or increase spending; government expenditure – increasing or cutting spending to influence demand and employment; public borrowing/debt management; budget (deficit or surplus budgeting); subsidies.
Monetary policy works through banks' lending; fiscal policy through taxes and spending.