Level of economic activity. The higher the level of economic activity, the higher the money supply because people get loans from banks to finance these activities and the lower the level of economic activity, the lower the need for loans hence low money supply.
The nature of monetary policy. A tight/ restrictive/ contractionary monetary policy leads to low money supply in an economy while an expansionary monetary policy leads to high money supply in an economy.
The level of monetization of the economy. An economy with a large monetary sector has got high money supply. However, an economy with a large subsistence sector where money is not used as a medium of exchange has got low money supply.
The rate of government borrowing (financial accommodation). A high rate of government borrowing from the central bank implies printing more money which leads to high money supply. On the other hand, a low rate of government borrowing leads to low money supply as less money needs to be printed.
Balance of payments position. A balance of payments surplus leads to high money supply because foreign exchange earnings are converted into low currency. On the other hand, a balance of payments deficit leads to low money supply because local currency is used to close the deficit.
The level of capital inflow and outflow. Capital inflows say in form of foreign investments by foreigners lead to high money supply while capital outflows like profit repatriation lead to low money supply.
The level of credit creation by commercial banks. The higher the level of credit creation by commercial banks, the higher the money supply and the lower the level of credit creation by commercial banks, the lower the money supply. Credit creation leads to high money supply through the multiplier process.
Method of deficit financing. Printing of more money by the government through the central bank to meet budgetary deficits leads to high money supply and government borrowing from the public to finance budgetary deficits leads to low money supply
Issuing of currency. The central bank has the sole authority to issue the country’s currency that circulates within the country i.e. it is the one responsible to order for minting of coins and printing of bank notes that act as legal tender within the country.
It acts as a banker to the government and government institutions i.e. it accepts the deposits from the government and safeguards such deposits as well as providing other banking services.
It is a banker to commercial banks and other financial institutions i.e. it accepts and safeguards deposits from commercial banks and acts as a clearing house to settle inter-bank indebtedness.
It acts as a banker to international agencies operating within the country e.g. IMF, Red Cross, F.A.O, UN agencies.
It controls the amount of money in circulation. The central bank uses the tools of monetary policy to regulate the amount of money in circulation and ensure economic stability.
It manages the country’s debt (public debt). The central bank is responsible for keeping an up-to-date profile/ record on the country’s total indebtedness.
It advises the government on monetary and economic issues e.g. formulating budgets, taxation, devaluation and other economic policies.
It is responsible for the control and supervision of all commercial banks and other financial institutions i.e. it ensures that peoples’ money is not at risk through close monitoring and supervision of these institutions.
It acts a custodian of foreign reserves. The central bank acts as the manager of foreign reserves in the country.
It regulates foreign exchange rates. The central bank is responsible for the day-to-day management of foreign exchange operations carried out by forex bureau.
A monopoly is able to provide better working conditions to employees because of the high profits realised
In some monopolies, high standards of services/goods are offered
Monopolies always enjoy economies of scale. This may help the consumer in that the goods supplied by a monopoly will bear lower prices.
A monopolist may use the extra profit earned to carry out research and thus produce higher quality goods and services.
The consumer is protected in that essential services such as water and power supply is not left to private businesses who would exploit the consumers.
DISADVANTAGES OF MONOPOLY
Limited competition: Monopolies reduce or eliminate competition in the market, which can lead to higher prices and reduced choices for consumers. Without competitive pressure, a monopolistic company may have little incentive to innovate, improve product quality, or offer competitive pricing.
Higher prices: Monopolies have the power to set prices at their discretion since there are no alternative options for consumers. As a result, monopolistic companies may charge higher prices, leading to reduced affordability and potential exploitation of consumers.
Lack of consumer choice: With limited or no competition, consumers have fewer choices when it comes to products or services. Monopolies can dictate what is available in the market, limiting consumer options and potentially restricting innovation and variety.
Inefficient allocation of resources: Monopolistic companies may not have the same incentives to operate efficiently compared to competitive markets. Without competition, there is less pressure to optimize production processes, reduce costs, or invest in research and development. This can result in an inefficient allocation of resources and lower overall productivity.
Barriers to entry: Monopolies often establish barriers to entry, making it difficult for new competitors to enter the market. This can stifle entrepreneurship and innovation, as potential new entrants face significant obstacles in establishing a foothold in the industry.
Reduced consumer surplus: Consumer surplus refers to the difference between what consumers are willing to pay for a product or service and what they actually pay. In a monopoly, the ability to set higher prices reduces consumer surplus, as consumers are forced to pay higher prices without alternative options.
Potential for abuse of power: Monopolies hold significant market power, which can lead to the abuse of that power. This can include anti-competitive practices such as predatory pricing, exclusionary tactics against competitors, or unfair treatment of suppliers.
Lack of incentives for innovation: In competitive markets, companies are driven to innovate in order to gain a competitive edge and attract customers. In a monopoly, where there is no threat from competitors, the incentive for innovation may be diminished, leading to slower technological advancements and limited progress.
Negative impact on smaller businesses: Monopolies can have a detrimental effect on smaller businesses that are unable to compete with the dominant company. Smaller businesses may struggle to survive or may be forced out of the market altogether, leading to a concentration of economic power.
Economic inequality: Monopolies can contribute to economic inequality by consolidating wealth and power in the hands of a few individuals or entities. This can exacerbate income disparities and limit opportunities for smaller businesses and entrepreneurs.