Commercial banks play a crucial role in supporting economic growth during a period of rapid expansion. They do so primarily through their lending activities and their role in credit creation.

How banks support economic growth:

• Increased Loan Availability: During economic growth, businesses often require capital to expand their operations, invest in new equipment, and hire more workers. Banks can increase the availability of loans to meet this demand.
• Credit Creation: When banks lend money, they create credit, which increases the money supply. This provides more funds for businesses to invest and expand.
• Reduced Borrowing Costs: During periods of growth, banks may offer lower interest rates on loans to encourage investment and stimulate economic activity. This makes borrowing more attractive to businesses.
• Efficient Allocation of Capital: Banks assess the creditworthiness of borrowers and allocate capital to the most productive sectors of the economy. This ensures that resources are used efficiently.
• Facilitating Trade: Rapid economic growth often involves increased international trade. Banks provide foreign exchange services and facilitate trade finance, supporting this growth.

Example: If a manufacturing company wants to expand its production capacity, it can obtain a loan from a commercial bank. This loan allows the company to purchase new machinery, hire more workers, and increase its output, contributing to overall economic growth. The bank's lending activity directly fuels this expansion.

The statement that central banks are independent from political influence is largely true and crucial for their effectiveness. Independence allows central banks to make decisions based on economic considerations rather than short-term political pressures. This is vital for maintaining price stability and long-term economic health.

Arguments for Independence:

• Price Stability: Political pressure could lead a central bank to keep interest rates low even if inflation is rising, undermining their primary objective of price stability. Independence allows them to implement necessary measures, even if unpopular politically.
• Credibility: An independent central bank gains credibility with markets and the public. This credibility helps anchor inflation expectations, making it easier to control inflation.
• Long-Term Focus: Political cycles are often short-term. An independent central bank can focus on long-term economic goals without being swayed by electoral considerations.

Examples of Political Influence (and why it's problematic):

• Argentina (Historically): Argentina has a history of political interference in its central bank, leading to high inflation and economic instability. Governments often pressured the central bank to finance government spending, fueling inflation.
• Zimbabwe (More Recently): Zimbabwe's central bank experienced significant political interference, resulting in hyperinflation and economic collapse. The government often ignored the central bank's warnings about fiscal policy and monetary policy imbalances.

However, complete independence is not always feasible or desirable. Central banks are still accountable to the public and must operate within a framework of accountability. This can involve regular reporting to parliament and transparency in their decision-making processes. A balance between independence and accountability is essential.

In conclusion, while complete political independence may be difficult to achieve, a high degree of independence is essential for central banks to effectively manage the economy and maintain price stability. The examples of Argentina and Zimbabwe demonstrate the detrimental effects of political interference.

Money performs several crucial functions in an economy:

1. Medium of Exchange: Money is widely accepted as payment for goods and services. This eliminates the need for barter, making transactions more efficient. Without money, bartering would be cumbersome and limit economic activity.
2. Store of Value: Money allows people to save purchasing power over time. While inflation can erode its value, money generally retains its value better than most goods and services. This encourages saving and investment.
3. Unit of Account: Money provides a common measure of value for goods and services. This allows for easy comparison of prices and the calculation of economic activity (e.g., GDP). A consistent unit of account simplifies accounting and financial decision-making.
4. Standard of Deferred Payment: Money facilitates borrowing and lending. Loans are typically repaid in monetary terms, allowing for long-term investments and economic growth. Without a reliable unit of account, lending and borrowing would be difficult to manage.

Each of these functions is essential for a well-functioning economy. They facilitate trade, encourage saving and investment, and provide a framework for economic planning.