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Questions and Answers
What is one of the key roles of a central bank regarding foreign exchange reserves?
What is one of the key roles of a central bank regarding foreign exchange reserves?
How does the central bank try to stabilize foreign exchange rates?
How does the central bank try to stabilize foreign exchange rates?
What does the central bank do to manage exchange control operations?
What does the central bank do to manage exchange control operations?
What is the purpose of the clearing house department operated by the central bank?
What is the purpose of the clearing house department operated by the central bank?
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In what capacity does the central bank act as a clearing house for transfer and settlement?
In what capacity does the central bank act as a clearing house for transfer and settlement?
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Match the following roles of a central bank with their descriptions:
Match the following roles of a central bank with their descriptions:
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Match the following actions of a central bank with their functions:
Match the following actions of a central bank with their functions:
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Match the following terms related to exchange control operations with their meanings:
Match the following terms related to exchange control operations with their meanings:
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Match the following functions regarding clearing house operations with their details:
Match the following functions regarding clearing house operations with their details:
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Match the role of a central bank in setting exchange rates with its objective:
Match the role of a central bank in setting exchange rates with its objective:
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Study Notes
Central Banks in Developing Countries
- In developing countries, central banks are responsible for developing a strong banking system to support agriculture, industry, trade, and commerce.
- They have additional powers of supervision and control over commercial banks.
Objectives of Monetary Policy
- Economic growth: low interest rates encourage economic growth by allowing firms to invest in capital at a lower cost.
- High employment: monetary policy affects the national money supply and availability of credit, leading to increased demand for employees and a decrease in unemployment rate.
- Price stability: maintaining price stability is necessary for a healthy economy, as it provides security and confidence for consumers and businesses.
Roles of Central Banks
- Banker, Fiscal Agent, and Advisor to the Government: central banks act as bankers, fiscal agents, and advisers to governments, managing government deposits, buying and selling foreign currencies, and advising on economic and monetary matters.
- Custodian of Cash Reserves of Commercial Banks: central banks hold cash reserves of commercial banks, facilitating transactions, and providing financial help in times of emergency.
- Controller of Credit: central banks control the amount of credit-money created by banks, using quantitative and qualitative methods to influence and control credit creation.
- Lender of the Last Resort: central banks provide temporary accommodation to commercial banks, bill brokers, and dealers in times of stress, preventing widespread panic withdrawal and damage to the economy.
Functions of Central Banks
- Managing monetary policy to achieve price stability and prevent liquidity crises.
- Preventing financial crises and ensuring the smooth functioning of the payments system.
- Restricting or expanding the supply of cash according to the requirements of the economy.
- Influencing credit creation by commercial banks to stabilize economic activity.
- Acting as a lender of the last resort to prevent the collapse of financial institutions.
Importance of Central Banks
- Central banks provide elasticity to the monetary system and influence prices and market rates.
- They increase the liquidity and elasticity of the credit structure of the economy.
- They enable commercial banks to carry on their activities even with limited cash reserves.
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Description
Explore the role of a central bank in managing government funds, national debt, and gold reserves. Learn about its functions as the banker and custodian of government wealth.
