Question

Explain the two main functions of central bank.

Hint:

Central banks manage monetary policy and provide banking services to the government and commercial banks to ensure economic stability.

Answer 1

Step 1: Defining the Role of a Central Bank:
A central bank is a financial institution responsible for managing a country’s monetary system and overseeing the commercial banking sector. It is tasked with regulating money supply, interest rates, and credit to maintain economic stability and growth. Central banks play a critical role in ensuring the soundness of the financial system and fostering confidence in the national currency.
Step 2: Two Main Functions of a Central Bank:
- Monetary Policy Control: One of the central bank’s primary functions is the implementation of monetary policy, which controls the money supply and interest rates in the economy. By adjusting interest rates and engaging in open market operations, the central bank influences inflation, employment, and overall economic growth.
- Banker to the Government and Other Banks: The central bank acts as the banker to the government by managing its accounts, issuing government bonds, and overseeing the country’s foreign reserves. It also serves as the lender of last resort to commercial banks, providing them with emergency funds in times of liquidity crises.
Step 3: Final Conclusion:
The two main functions of a central bank are the regulation of monetary policy to control inflation and stimulate growth, and the provision of banking services to the government and other commercial banks. These roles are vital for maintaining economic stability and supporting the financial system.