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Posted by on Aug 31, 2016 in Central Bank, Finance, Tax |

Tax – The lifeblood of a state

Tax – The lifeblood of a state

Tax is a levy aka financial charge imposed on people, property, and other entities. The state is the only party that can set taxes and they have the right to punish those that evade them. The money from the taxes is the primary source of funding for the government. That money goes into the paychecks as well as various projects that government finds useful.

  Those projects range from economic infrastructure investments (roads, education, sanitation and so on), research, public works up to data collection and the operation of the government. The state has to adapt their spending to the amount of money received through the tax. If the spending exceeds the tax amount, then the country goes in debt (this is a case with the majority of the countries in the world).

A country uses several different taxes and the shift tax rates depending on the situation in the state. This distribution of the tax serves as a net that covers all entities within the state. The right tax distribution taxes everyone depending on the size of their revenue. Rich get high taxes while poor get low taxes. If we take a look at the near history, we may see that this was not a case. In last 30 years, the tax burden went from poor to wealthy, but it is still not where it should be.

  A way in which the state handles tax system is a reflection of its ruling party and the path in which they are leading the country. Every system of the taxes has several aspects which reflect the intentions of those that set it. Those elements include the decisions regarding the targeted types of people that will be taxed and the height of the taxes depending on the kind of the community. Another important aspect of the tax system is the distribution of the resources gathered through the taxes. The perfect tax system is the system that takes the percentage of the earnings into account. The poor should have same tax rate as the rich, and the wealthy shouldn’t have any tax relief. This type of thinking is still new, but last 20 years found the raise of the support for this kind of system.

The tax system that is fundamentally wrong fails to tax the right parties efficiently. This leads to additional taxes for those that are burdened by reasonable taxes. The depression that started in 2008 revealed the inefficiency of many tax systems all over the world. Some countries adapted, and they changed their tax system which leads to better taxation of those who were tax-free. Other countries failed to apply that, and they added new charges that brought their economies to the brink of destruction.


And finally, taxes (also known as fees) may be applied to monetary transactions. So if you want to start your career as a trader, then you should look for a way to reduce the tax on your payments. If you want to avoid high taxes on binary options trading, then check Top 10 Binary Demo.

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Posted by on Aug 12, 2016 in Central Bank, Finance, Policy Instruments |

Central Bank – Policy instruments in its hands

Central Bank – Policy instruments in its hands

In the majority of the democratic countries, a central bank is free from the political influence and due to that it wields a lot of power. Freed from the clutches of different political parties the central bank has many financial instruments with which they maintain the healthy monetary policy. Some of these tools are visible, but some can’t be seen, and they influence the monetary policy from the shadows.

Content goes here The Central Bank uses open market operations to pump more money into the economy. This entity can buy bonds on the market, and they pay for those bonds with the newly printed money. These operations can also work as a means for lowering of a particular security. If the amount of money is too large, the bank can sell the securities it owns and in effect reduce the money supply. The central bank can give a short-term boost of money to the market through temporary loans for collateral securities (this short term money increase may last from a week to a month).

Exchange requirements represent the ability of the bank to enforce the rule that all foreign receipts must be exchanged for the primary currency of the country. The rate of the purchase of that currency is, in most cases, based on the market (in some cases the bank sets the price). The bank can also limit the use of the currency in the hand of the recipient. They can set a time limit within which the money can’t be traded for other currencies and similarly enforced boundaries.

Capital requirements represent the universal law that every bank needs to have a certain percentage of their assets in capital. The height of the rate is in the hands of the central bank. Every bank that operates in a country, domestic or international branch, has to respect the rate set by the monetary authority of the same country. Capital requirements are far more useful in the prevention of indefinite lending than the reserve requirements that exists solely for that. The high effectiveness of the capital requirements comes down to the law of threshold. This rule (law) states that a bank can’t provide loans if it doesn’t have enough capital in its reserve. If it wants to continue with their lending, they have to acquire more money.

The interest rate is an obvious and the most powerful instrument of the central bank. The interest rate is never fixed; it goes up and down depending on the various influences. An explicit (target) interest rate always exists, and this monetary authority borrows and lends money to keep the rate as close to that target as possible. The target rate changes depending on the requirements of the economy within the country.

The Central bank doesn’t keep the interest rate on the target at all possible times. That would mean constant money investments which would weaken the currency. As always, this entity has to balance various demands and use their instruments in the best possible way. For example, if the central bank focuses on the inflation, the interest rate may move freely in any direction.

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Posted by on Aug 11, 2016 in Central Bank, Finance, Prices Stability, Uncategorized |

Understanding the role of a central bank

Understanding the role of a central bank

    Many people don’t understand the role a central bank has in a country. And due to that, they don’t realize the extent of the influence over the currency markets that this bank has. To understand its role we have to start from the beginning and explain primary duties this monetary authority possesses.

   A central bank has power over the amount and the strength of the state’s currency as well as interest rates within the country. They also have a duty to oversee the commercial system of banking in their respective country. This entity has full monopoly over the monetary base in a country, which means that they can print money whenever the need arises. To find more information check Wikipedia.

    The most fundamental and the imperative duty of this entity are to control the monetary policy of the country. One way to do this is through money printing. Other instruments that the bank uses include management of interest rates, lending to the banking sector, setting the reserve requirement and so on. Another important duty of a central bank is the supervision of the banking system within the country. They employ instruments that reduce the risk of reckless and fraudulent behavior in this sector.

    The stable monetary policy creates a strong currency. Stable currency leads to several changes in the country, and those changes are the goals of the central bank. Some of the most important aims that this monetary authority strives for include:

–    The stability of the prices through the controlled inflation is one of those goals. As you know, a high inflation reduces the value of the currency and increases the prices of the goods. Small inflation is useful for reducing the interest rate, which is also a bad for a country. A central bank tries to keep the inflation on a slow and steady increase. In this way, the economy can grow along with it.

–    High employment is a reflection of a robust and stable economy. Central bank aims to increase the rate of employment with several instruments, all depending on the type of the unemployment in the state. Three distinct types of unemployment exist (as measured by this monetary authority). First, there is the frictional unemployment which represents the period in which the worker’s transition between the jobs. Unintentional unemployment is the worst form of the unemployment. It happens when there is a lack of job positions on all levels. Structural unemployment occurs when there is demand for one type of workers, while those that have different skills have no job.

–    Economic growth is also an important goal of the central bank. To encourage economic growth this monetary authority lowers the interest rate. When a country goes through high economic growth, this entity will raise the interest rate to avoid market bubbles. The low-interest rate is good for economic growth, but it is devastating for the financial world and vice versa. A central bank has to shift their monetary policy to accommodate both sides, but it also needs to be careful not to damage either of those two.

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