Central Bank Functions for Government and Wealth Management

10 Questions

What is one of the key roles of a central bank regarding foreign exchange reserves?

Fixing exchange rates of foreign currencies

How does the central bank try to stabilize foreign exchange rates?

By holding exchange rates within narrow limits

What does the central bank do to manage exchange control operations?

Supplying foreign currencies as per government regulations

What is the purpose of the clearing house department operated by the central bank?

To provide free service in clearing cheque claims for commercial banks

In what capacity does the central bank act as a clearing house for transfer and settlement?

As a reserve holder for commercial banks

Match the following roles of a central bank with their descriptions:

Custody and Management of Foreign Exchange Reserves = Official reservoir of gold and foreign currencies Clearing House for Transfer and Settlement = Acts as a clearinghouse for transfer and settlement of mutual claims of commercial banks

Match the following actions of a central bank with their functions:

Selling gold at fixed prices to monetary authorities = Managing foreign exchange reserves Fixing exchange rates of domestic currency in terms of foreign currencies = Bringing stability in foreign exchange rates

Match the following terms related to exchange control operations with their meanings:

Supplying foreign currencies to importers and travelers = Managing exchange control operations Following rules laid down by the government = Operating within regulations for exchange transactions

Match the following functions regarding clearing house operations with their details:

Transferring funds between commercial banks = Facilitating clearing of cheques Making transfer entries in bank accounts = Principle used for transferring funds

Match the role of a central bank in setting exchange rates with its objective:

Holding rates within narrow limits = Maintaining stability in foreign exchange rates

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.