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Thread: MGT411 GDB2 Deadline 25 June 2010

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    Senior Member viki's Avatar
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    99 MGT411 GDB2 Deadline 25 June 2010

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    “It is always claimed by the commercial banks in the economy that their “Net-Worth” fall sharply when Central bank adopt the contraction monetary policy in the periods of high inflation in the economy. What do you think is this right or wrong? Give comments in its favor or against.”

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    Senior Member viki's Avatar
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    Thumbs up Solution Of MGT411 GDB2

    Disagree Statment
    Its Just an opinion

    "I disagree because when central bank adopt contraction monetary policy they actually are trying to reduce the circulation of money from the economy to cure inflation, in that case they'll increase the interest rates, which will encourage depositors to deposit more and more and discourage the public get loan (because rates will be to high). So with the increase in deposit net worth of commercial bank will increase because net worth=total debts equity."


    Agree Statment

    In my point of view this statment is right
    Contractionary monetary policy is monetary policy that seeks to reduce the size of money supply.
    Net worth is the total assets minus total outside liabilities of bank.

    When the central bank is "tightening", it slows the process of private bank issue by selling securities on the open market and pulling money (that could be loaned) out of the private banking sector. By increasing the supply of bonds, this lowers their prices and raises interest rates at the same time that the money supply is reduced.
    So when Central bank adopt the contraction monetary policy in the periods of high inflaction in the economy, the prices are lowers and interest rates are increase Due to it net worth fall or decrease.
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