Money and banking are major case studies in terms of macroeconomics. The main aim of every macroeconomics is economic stability, low unemployment, and low inflation. We are going to be discussing money and banking with their roles in achieving macroeconomic goals.


Money is one of the most important discoveries of human civilization. It is difficult to think about the world without money. Everybody needs money for various purposes; starting from the day–to–day transactions to saving for the future.

Banking And Finance

Banking is a Financial institute in which so many activities are carried out, which accept deposits from individuals and other entities, and then use this money to offer loans and to invest and earn profit.

Banks are highly placed into certain categories because of the type of business they conduct. Commercial banks provide services to private individuals and businesses. Retail banking provides credit, deposit, and money management to individuals and families.


Community Banking

Online Banking

Savings and Loan Banking

Investment Banking

Commercial Banking

Community Type of Banking

These banks are smaller than commercial banks because these are groups. They are mainly found or the main function is for the local market. They provide more personalized service and build relationships with their customers.

Online Type of Banking

Online banking provides easy services transactions via the world wide web (www) which makes it quick and easy for their customers. The part is also known as e-banking or net banking. Most other banks now offer online services. There are many online-only banks. Since they have no branches, they can pass cost savings onto the consumer.

Savings and Loan Type of Banking

This type of banking is specialized in giving loans giving to individuals or organizations to promote their business and return. Often these banks will offer a higher interest rate to depositors as they raise money to lend for mortgages.

Investment Type Of Banking

This is a type of banking in which Investment of capital is used in funding corporations through initial public stock offerings or bonds. They also facilitate mergers and acquisitions.

Commercial Type of Banking

A commercial bank is a financial institution that is primarily concerned with accepting deposits from the public and lending to the public besides others. These banks operate both in the public as well private sectors.

Functions of Commercial Banks

Commercial banks normally perform the following functions in an economy:

(I)Transfer of Funds: The banks provide the facility of fund transfer to its
customers through the instruments of cheque demand draft or electronic
transfer from one place to another or one person to another.

(II) Agency Functions: Banks receive and collect different types of payments on behalf of their clients through the instruments of cheques, drafts, bills, promissory notes, etc. Banks also buy and sell gold, silver, and other securities on behalf of their customers.

(III) Sale and Purchase of Foreign Exchange: This is another important function of a commercial bank which has increased tremendously with the increasing volume of international trade, particularly in the era of globalization.

(IV) General Utility Services: In modern days the banks also perform some very useful functions for the benefit of their customers and the economy like collection and publication of data, advisory functions, issue of lockers, and underwriting of loans, shares, and debentures issued by the government.

(V) Acceptance of deposits: Every commercial bank accepts deposits from different sections of society including the general public, business entities, and other institutions. Commercial banks accept the following types of deposits

Types Of Commerical Banking Deposit

Current Account Deposits or Demand Deposits

Savings Account Deposits

Fixed Deposit or Time Deposit or Term Deposit

Current Account Deposits or Demand Deposits: This type of account is generally maintained by the business entities and money under these deposits are payable on demand of the depositor. The depositors are free to deposit or withdraw money from their account any number of times without any restrictions.

Savings Account Deposits: This type of account is generally maintained by households or individuals. The depositor can deposit or withdraw money deposited under this account only a limited number of times. Money and banking account also attracts a nominal rate of interest payable to the account holder.

Fixed Deposit or Time Deposit or Term Deposit: Under this account, money is deposited for a fixed period and the rate of interest is relatively higher than other accounts depending on the tenure of the fixed deposit.


Central Bank is an apex bank in an economy that is owned by a country and entrusted with the task to control, regulate and supervise the entire banking operations of other banks or commercial banks including the formulation and implementation of monetary policy in the economy.

Functions of Central Bank

(i) Bank of issuing or currency: Every central bank of an economy is the sole authority to issue currency. The currency issued by the central bank is backed by a minimum receive of assets like gold coins, gold bullions, foreign exchange, etc. kept with the central bank.

(ii) Banker to the banks: The central bank acts as a banker to the commercial banks in the following manner.

Custodian of the cash reserves of the commercial banks (CRR). Lender of the last resort in the sense that if commercial banks fail to generate enough cash from their own sources they approach the central bank as a last resort. The central bank in turn may grant loans and advances to the needy banks. The central bank also acts as a central clearing house for the commercial banks.

(iii) Banker to the government: As a banker to the government the central bank carries out all banking businesses on behalf of both the central government and the state governments. It maintains the current account of the government for keeping cash balances and also making and receiving payments on behalf of the government. It provides loans and advances to the government. It also acts as a financial advisor to the government.

(iv) Custodian of the stock of gold and foreign exchange reserves of the nation: This function helps in maintaining stability in the exchange rate as fixed by the government and also enforcing exchange control and other regulations for a favorable balance of payments for the economy.

(v) Controller of credit and money supply: Credit control and control of money supply is probably the most important function of a central bank.
Through various methods/instruments of credit control the central bank aims.


Monetary policy is a measure used by the central bank in other to control and regulate the money supply and credit in the economy. There are some quantitative checks that affect the total volume of credit and all sections of the economy in a country which are

(i) Bank Rate Policy: Bank rate is the rate at which the central bank provides loans to commercial banks. The increase in bank rate by the central bank increases the cost of funds to the commercial banks which in turn is passed on to their customers.

A high rate of interest reduces demand for loans and thus the quantity of credit/money in the economy which squeezes aggregate demand in the economy. The bank rate is increased to control inflation in an economy and it is reduced to fight deflationary situation in the economy.

(ii) Open Market Operations: Open market operations refer to the policy of sale and purchase of government securities in the open market by the central bank. The central bank sells and purchases these securities mainly to and from the public and commercial banks.

If the central bank wants to control inflation it sells securities in the market so that the excess liquidity may be transferred from the public to the central bank. This measure controls the aggregate demand and inflation in the economy.

The central bank starts purchasing securities in the market to boost aggregate demand and fight deflation in the economy.

(iii) Variable Legal Reserve Ratio: The central bank can influence the credit-creating power of commercial banks by varying CRR and SLR. An increase in LRR reduces the credit creation capacity of commercial banks and a decrease in LRR increases the power of the banks. LRR is increased during inflation and decreased during deflation.

Recommended read: Tips For Easily Transferring Money Between Banks

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