Question

Define central bank and explain its functions.

Hint:

The central bank is the "boss" of all other banks. Its main jobs are printing money, managing the government's finances, and controlling the country's overall money supply.

Answer 1

Definition: A central bank is the apex financial institution of a country. It is responsible for regulating the country's banking system and managing its money supply and credit policies. It acts as the leader of the money market. Functions of a Central Bank:

Issuer of Currency: It has the sole authority to issue currency notes in the country. This ensures uniformity in the nation's currency.
Banker to the Government: It acts as a banker, agent, and financial advisor to the government. It manages government accounts, makes payments on its behalf, and manages public debt.
Banker's Bank and Supervisor: It acts as the bank for all commercial banks. Commercial banks must keep a certain percentage of their deposits as reserves with the central bank. It also supervises and regulates their activities.
Lender of Last Resort: When commercial banks face a financial crisis and cannot get help from anywhere else, they can approach the central bank for loans as a last resort.
Controller of Credit: This is a crucial function. The central bank uses various tools of monetary policy (like the bank rate, repo rate, CRR, and open market operations) to control the amount of credit created by commercial banks.
Custodian of Foreign Exchange Reserves: It manages the nation's reserves of foreign currencies to maintain stability in the foreign exchange rate.