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level: The Role of the Central Bank

Questions and Answers List

level questions: The Role of the Central Bank

QuestionAnswer
What are the 2 Essential Roles for the Central Bank?-Act as a Banker to the Government -Act as the Lender of Last Resort
Why is the Central Banks role of being the Lender of Last Resort so Crucial in an Economy?-If a Bank borrows Short Term but Lends Long Term, they can face a Shortage of Liquidity. The Central Bank can Lend Money to ensure they don't Collapse -The Bank of England has a Predictable and Routine Scheme to Provide Liquidity. Also, there are Emergency Schemes too -The Interest Rates on Emergency Funds make an Incentive for the Bank to Behave
What Advantages do Central Banks being the Lender of Last Resort have?-Helps to prevent Panic and a Run on the Banks -Reduces the Impact of Financial Instability
What Disadvantages do Central banks being the Lender of Last Resort have?-Leads to Moral Hazard and Banks to take High Risks -Banks not holding Sufficient Liquidity -Unfair that the Central Bank will help Financial Institutions but not Non-Financial Institution
How can Central Banks act as the Banker to the Government-A Central Bank helps the Government manage the National Debt. This may involve Issuing Government Bonds -It also can offer Advice to the Government on Economic Matters, and help in Negotiating with International Financial Organisations -Note: It is the Debt Management Office, NOT the Bank of England, that issues Gilts (Gov Bonds) The Bank of England does play a Huge Role however in Facilitating the Transaction and Banking Services
How can Central Banks help Regulate the Financials Sector?-Central Banks can Impose Rules to Prevent Financial Market Failure and Instability. This helps create Macroeconomic Stability in the Economy
How can Central Banks implement Monetary Policy?-The Central Bank can Manage the Money Supply via affecting the Availability of Credit and its Cost. This is done via Interest Rates or Quantitative Easing -Capital Requirements can also be Set up, affecting the amount of Loans that Banks can issue -The Exchange Rate can also be Influenced, by Selling and Buying Currencies and Changing the Interest Rate -Responsible for Issuing Banknotes and making the Confidence in the Currency is Maintained