Central Bank Functions Quiz
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Questions and Answers

What is the impact of price stability on purchasing power?

  • Increases it
  • Maintains it at the same level (correct)
  • Has no effect on it
  • Erodes it

    • How does rapidly rising prices affect business decisions?

  • Ensures long-term stability
  • Promotes risk-taking
  • Encourages expansion
  • Leaves them without a solid basis for decisions (correct)

    • Why do people demand higher wages in an environment of increasing prices?

  • To save more money
  • To decrease their consumption
  • To encourage saving
  • To maintain their purchasing power (correct)

    • What is the role of central banks as fiscal agents to governments?

    <p>They keep government deposits and make payments on behalf of governments</p> Signup and view all the answers

    In the context of the text, how does monetary policy influence employment?

    <p>By reducing the money supply and credit availability</p> Signup and view all the answers

    Why is price stability considered a necessary precondition for a healthy economy?

    <p>To maintain confidence in economic decisions</p> Signup and view all the answers

    What traditional banking operations does the central bank perform for the government?

    <p>Deposits and lending</p> Signup and view all the answers

    What does it mean when it is mentioned that the central bank is the custodian of government money and wealth?

    <p>It holds and safeguards the government's money and assets</p> Signup and view all the answers

    In what capacity does the central bank act as an official agent to the government?

    <p>Dealing with gold and foreign exchange matters</p> Signup and view all the answers

    What role does the central bank play in advising the government on economic matters?

    <p>Advising on controlling inflation or deflation</p> Signup and view all the answers

    Why might it be more convenient for a central bank to operate as a banker to the state?

    <p>Due to economic efficiency and close ties between public finance and monetary affairs</p> Signup and view all the answers

    What is the primary function of the central bank in controlling inflationary and deflationary pressures?

    <p>Controlling the supply of cash</p> Signup and view all the answers

    How does the central bank earn profits from printing notes?

    <p>By having a monopoly of note issue</p> Signup and view all the answers

    What is the purpose of adopting qualitative methods by the central bank in controlling credit creation?

    <p>To stabilize economic activity</p> Signup and view all the answers

    How does the central bank control the cost and quantity of credit?

    <p>Through open market operations</p> Signup and view all the answers

    In what way does the central bank influence and control credit creation by commercial banks?

    <p>Through direct intervention in banking operations</p> Signup and view all the answers

    What is one of the key powers of the central bank in relation to money supply?

    <p>Being the ultimate source of cash</p> Signup and view all the answers

    What is the primary role of the central bank as the lender of last resort?

    <p>Preventing panic withdrawals from financial institutions</p> Signup and view all the answers

    How does the central bank provide assistance to financial institutions in times of stress?

    <p>By offering re-discounts and collateral advances</p> Signup and view all the answers

    What is the significance of the front door lending method used by the central bank?

    <p>It charges a lower interest rate compared to the market rate</p> Signup and view all the answers

    How does the central bank's role as lender of last resort impact the credit structure of the economy?

    <p>It increases both elasticity and liquidity of credit</p> Signup and view all the answers

    What is the aim of providing temporary accommodation through the 'back door' method?

    <p>To avoid lending to commercial banks directly</p> Signup and view all the answers

    Which of the following is NOT a benefit of the central bank operating as the lender of last resort?

    <p>Encouraging excessive risk-taking by commercial banks</p> Signup and view all the answers

    What role does the central bank play in relation to commercial banks' cash reserves?

    <p>It acts as the custodian of the cash reserves.</p> Signup and view all the answers

    How does centralizing cash reserves in the central bank benefit the banking system?

    <p>It provides a source of great strength to the banking system.</p> Signup and view all the answers

    How do centralized cash reserves facilitate a more elastic credit structure?

    <p>By providing a larger base for credit creation.</p> Signup and view all the answers

    What advantage does the central bank have in controlling credit creation by commercial banks?

    <p>Regulating the amount of cash reserves commercial banks must keep.</p> Signup and view all the answers

    In what situations can centralized cash reserves be most effectively utilized?

    <p>In times of financial crises or emergencies.</p> Signup and view all the answers

    How does the central bank assist commercial banks during financial difficulties?

    <p>By providing additional funds on a temporary basis.</p> Signup and view all the answers

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