4.4.3 Role of central banks

• What are central banks responsible for managing in a country?

  Monetary policy and stability
• One primary objective of central banks is to maintain price stability
• Central banks ensure financial stability by protecting savings and avoiding crises.
• What does the objective of full employment aim to reduce?

  Unemployment rates
• Sustainable growth supported by central banks encourages innovation and improves living standards
• Arrange the functions of central banks in maintaining economic stability:

  1️⃣ Issuing currency

  2️⃣ Acting as a banker to the government

  3️⃣ Lender of last resort

  4️⃣ Regulator of the banking system

  5️⃣ Manager of national debt
• Match the central bank function with its key activity:

  Issuer of Currency ↔️ Regulating the amount of currency in circulation

  Banker to the Government ↔️ Handling government receipts and payments

  Lender of Last Resort ↔️ Lending funds to banks in distress

  Overseeing Monetary Policy ↔️ Setting policy rates
• What type of loans do central banks provide during liquidity crises?

  Emergency loans
• Central banks use tools of monetary policy to manage the money supply
• How does lowering interest rates affect borrowing and investment?

  Encourages borrowing
• Lowering reserve requirements allows banks to lend more money.
• Central bank independence is crucial for maintaining price stability
• Independent central banks make monetary policy decisions free from political influence.
• What is the potential risk of government control over monetary policy decisions?

  Short-term political gains
• Central banks may target an inflation rate, for example, 2% to prevent significant price fluctuations.
• What are central banks responsible for managing in a country's economy?

  Monetary policy
• Maintaining inflation at a target level ensures the stability of the purchasing power of money
• Financial stability protects savings and avoids financial crises.
• What does the central bank lower interest rates to encourage?

  Investment and job creation
• Sustainable growth encourages innovation and improves living standards
• Which central bank acts as the banker to the government in the UK?

  Bank of England
• The lender of last resort function prevents bank runs during liquidity crises.
• Central banks supervise and regulate banks to ensure adherence to financial regulations
• Which central bank manages Japan's national debt?

  Bank of Japan
• Exchange rate management helps maintain currency stability through market intervention.
• What does the Reserve Bank of Australia set to influence economic activity?

  Cash rate
• Match the function of a central bank with its description:

  1️⃣ Issuing Currency

  2️⃣ Authority to print and distribute currency

  3️⃣ Banker to Government

  4️⃣ Managing government accounts

  5️⃣ Lender of Last Resort

  6️⃣ Providing emergency loans
• Open market operations involve buying and selling government securities to influence the money supply.
• When a central bank buys bonds, commercial banks' reserves increase by liquidity
• Match the regulatory function of a central bank with its benefit:

  Supervising banks ↔️ Reduces risk of reckless lending

  Ensuring compliance ↔️ Protects consumers from fraud

  Overseeing financial markets ↔️ Maintains investor confidence