WAEC Economics 2016 Theory — Question 6

Model answer

(a)(i) Building Society: This can be defined as a mutually owned financial institution which offers banking and related financial services to its members particularly and the generality of the public for building purposes. (ii) Central Bank: It is the apex bank in the country, the topmost financial institution. It is defined as the financial institution which is charged with the responsibility to regulate the affairs of all financial institutions in the country. (b) Instruments used by Central Bank to regulate supply of money: (i) Open market Operation: This has to do with buying and selling of financial documents such as bonds in the market so as to regulate the level of money supply in the economy. (ii) Reserve requirement: The central bank may require commercial banks to hold a portion (say 10%) of their deposit in their vault. This affects the amount commercial banks used to create money. (iii) Interest rate: The money the central bank lends the commercial banks are charged at some rate. If the central bank wants to increase the money supply, it will reduce the rate to entice the banks to borrow, and if they want to contract, they will increase the rate. (iv) Moral Suasion: The central bank can persuade the commercial banks so as to do what they wish. (v) Prudential guidelines: The central bank may in writing require the commercial banks to exercise special care in their operations so as to achieve a specified outcome.