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December 3, 2021 

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DIAMOND-WATER PARADOX: The perplexing observation that water, which is more useful than diamonds, has a lower price. If price is related to utility, how can this occur? This paradox was first proposed by classical economists in the 19th century and was subsequently used as a stepping stone for developing the notion of marginal utility and the role it plays in the demand price of a good. The paradox is magically cleared up with an understanding of marginal utility and total utility. People are willing to pay a higher price for goods with greater marginal utility. As such, water which is plentiful has enormous total utility, but a low price because of a low marginal utility. Diamonds, however, have less total utility because they are less plentiful, but a high price because of a high marginal utility.

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CENTRAL BANK:

The banking authority of a nation that is charged of ensuring a sound money supply and conducting the country's monetary policy. It is usually officially authorized by, and works closely with, the other government policy makers to achieve full employment, low inflation rates, and economic growth. The Federal Reserve System is the central bank of the United States.
A central bank is the monetary authority of a country. It controls the domestic money supply, conducts monetary policy, regulates the commercial banking system, and represents the country in international financial matters. While the specific tasks have evolved over the years, central banking is one of the key functions performed by government and has been around almost also long as money itself has existed.

The Federal Reserve System (the Fed) is the central bank for the United States economy. The Fed is actually the third central bank that has operated in the United States. The first two are conveniently termed the First Bank of the United States (operating from 1791 to 1811) and the Second Bank of the United States (operating from 1816 to 1836).

Unlike other central banks past and present, in the United States and other countries, the U.S. Federal Reserve System is a "decentralized" central bank. Rather a single "central" bank operating in the nation's capital or financial center, the Fed is actually a "system," operating 37 banks dispersed throughout the country.

The central banks in other industrial nation's are not only important to their domestic economics, but like the U.S. Fed are important to the global economy. The United Kingdom has the Bank of England, Japan has the Bank of Japan, Germany has the Deutsche Bundesbank, Australia has the Reserve Bank of Australia, Canada has the Bank of Canada, and the European Union has the European Central Bank. Most central banks go with a name such as "Bank of...," "Central Bank of...," or "National Bank of...," followed the relevant nation. A few central banks follow the lead of the U.S. Federal Reserve System and include the word "Reserve" in the title, such as the Reserve Bank of Zimbabwe.

The central bank of a nation performs several general functions. Not all central banks perform all functions to the same degree, but all functions are undertaken by central banks.

  • One, a central bank controls the domestic money supply of a country. It does this either directly by controlling the amount of currency in circulation, or indirectly by regulating commercial bank deposits.

  • Two, a central bank is one of several government entities that regulate commercial banks. The regulation undertaken by a central bank is usually intended to control the money supply of a country and to stabilize its financial sector.

  • Three, a central bank is often a financial agent for the national government, the place the government goes to for banking services. A central bank often maintains the government's revenue and expenditure accounts, pays its bills, and collects its debts. In the United States these functions are actually undertake by the Department of the Treasury rather than the Federal Reserve System.

  • Four, a central bank acts as the government representative in international financial and economic matters. The Federal Reserve System, for example, has a lot to say about exchange rates between U.S. currency and currencies of other nations.

  • Five, a central bank is also a prime source of economic and financial data. In their duties as commercial bank regulators and money supply controllers, central banks collect a great deal of information about bank deposits, reserves, assets, liabilities, interest rates, and a whole lot more. In his role as a pointy-heady, grumpy old economist, Professor Grumpinkston often looks to the Federal Reserve when he needs fast facts about the state of the economy.

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Recommended Citation:

CENTRAL BANK, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2021. [Accessed: December 3, 2021].


Check Out These Related Terms...

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