Central Bank Functions

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Questions and Answers

What is considered one of the leading objectives of central banks?

Full employment
Exchange rate stability
Price stability (correct)
Economic growth

What event in the 20th century led to a focus on achieving price stability?

The 1970s inflation
The Great Depression (correct)
The 1990s economic boom
The 1980s recession

What is a key element of achieving price stability?

Maintaining low interest rates
Increasing economic growth
Regulating the money supply
Controlling inflation (correct)

Why is price stability an important objective of central banks?

To prevent high levels of inflation (A) Signup and view all the answers

What is the main goal of central banks, despite also seeking to achieve economic growth?

Price stability (D) Signup and view all the answers

How does the central bank achieve price stability?

By conducting monetary policy (B) Signup and view all the answers

What is the relationship between price stability and economic growth?

They are conflicting (D) Signup and view all the answers

Why is price stability important for businesses?

It maintains confidence in the economy (C) Signup and view all the answers

What is the primary goal of the central bank in terms of price stability?

To control the money supply and credit to achieve price stability (A) Signup and view all the answers

Which system of banknote issue carries a high risk of inflation?

Unrestricted issue system (A) Signup and view all the answers

What is the role of the central bank in terms of commercial banks?

To supervise and regulate commercial banks (B) Signup and view all the answers

What is the central bank's role in times of war and crisis?

To provide exceptional loans to the government (A) Signup and view all the answers

What is the central bank's role in managing public debt?

To supervise the issue of public loans (B) Signup and view all the answers

What is the central bank's role in maintaining the stability of the financial system?

To enable smooth and swift clearing and settlements of inter-bank transactions (A) Signup and view all the answers

What is the central bank's role in terms of commercial banks' reserves?

To require commercial banks to maintain a portion of their demand and time liabilities as cash reserves (D) Signup and view all the answers

What is the central bank's role in terms of lending to commercial banks?

To provide loans to commercial banks when necessary (C) Signup and view all the answers

What is one way the central bank directly affects the money supply?

Controlling the issued money (banknotes) (D) Signup and view all the answers

What is a primary goal of a central bank?

Supporting the monetary and economic system (D) Signup and view all the answers

What does central bank independence refer to?

Freedom from direct political or governmental influence (A) Signup and view all the answers

How is the state involved in the process of issuing banknotes?

By supervising and imposing legal restrictions (D) Signup and view all the answers

What is a characteristic of the 'entire gold reserve' system?

Banknotes are entirely covered by gold reserves (D) Signup and view all the answers

What happens under the 'relative gold reserve' system?

A percentage of issued money is covered by gold, rest by bills and bonds (A) Signup and view all the answers

What kind of correlation exists between the independence of the central bank and the rate of inflation?

Inverse correlation (A) Signup and view all the answers

Which of the following is not a component used to cover issued money under the relative gold reserve system?

Equity shares (D) Signup and view all the answers

Flashcards

Price Stability

Maintaining stable prices to prevent high inflation rates.

Great Depression

Severe worldwide economic downturn in the 1930s.