The paper "Five Objectives of Central Bank" is a wonderful example of an assignment on macro and microeconomics. The central bank is the main agency for monetary policy. It also performs significant functions in maintaining financial stability in the country, and these become more evident during financial turmoil. The structure of roles and responsibilities and the range of functions of the central banks vary in various countries. However, the main functions are (Touffut, 2009); Price stability; the central bank regulates a country’ s inflation. By definition, inflation refers to the persistent increase in price levels relative to goods and services, or the devaluation of the currency.
The central bank regulates the inflation level by controlling the supply of money in the economy by the use of monetary policy tools. It uses the open market operations which either inject liquidity in the economy or absorb the extra monies, thus affecting the inflation level directly. Interest rates stability; the central banks set the general interest rates that determine whether people would prefer to hold liquid cash or deposit the money into the banks. The central bank gives commercial banks instructions on which interest rates they should impose on their customers.
High-interest rates discourage investors from taking loans while low-interest rates encourage investors to borrow money in terms of loans. When rates are low people may borrow more and this gives another role of the central bank as being the lender of last resort. Commercial banks lend money to customers on the basis of first come first serve. The fact that commercial banks do no hold reserves to meet the needs of the entire market demand and so it may run short of liquidity.
In this case, the commercial bank is forced to borrow money from the central bank. This bin turn enhances system stability because the central bank cannot favor any particular commercial bank at the expense of others. It also provides funds to the government in times of difficulty. Financial stability; Central banks are the sole authority for establishing the economy’ s financial stability as it has comprehensive information on aspects posing a threat to financial stability through the surveillance and research functions.
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