4.4.3 - Role Of Central Banks

Question 1

What Is The Role Of Central Banks?
(4 Points)

Answer 1

~ Controls monetary policy.

~ Acts as a banker to the government.

~ Act as a banker to banks (Lender of last resort).

~ Regulate the financial system.

Question 2

Describe ‘Controls Monetary Policy’ As A Role Of The Central Bank
(2 Points)

Answer 2

~ Manipulates interest rates and money supply.

~ To keep inflation low and stable.

Question 3

Describe ‘Acts As A Banker To The Government’ As A Role Of The Central Bank
(3 Points)

Answer 3

~ Holds the governments bank account and lend to the government.

~ Holding government debt.

~ Holding reserves.

Question 4

Describe ‘Acts As A Banker To The Banks’ As A Role Of The Central Bank
(4 Points)

Answer 4

~ Commercial banks are able to borrow from the central bank.

~ If they run into short-term liquidity issues.

~ Thos provides financial stability, as if one bank falls it tends to lead to the collapse of others.

~ If a bank falls, it means less saving, so less lending, so less consumption and investment.

Question 5

Describe ‘Regulate The Financial System’ As A Role Of The Central Bank
(2 Points)

Answer 5

~ Prevent financial institutions from engaging in activities, that harm consumers or that would lead to collapse.

~ Ensures financial stability.

Question 6

Why Is Financial Stability Important?
(3 Points)

Answer 6

~ Ensures confidence stays high.

~ Reduces panic.

~ Reduces financial instability.

Question 7

What Are Types Of Financial Market Regulation?
(3 Points)

Answer 7

~ Ban market rigging, with strong enforcement.

~ Prevent sale of unsuitable products to consumers.

~ Maximum interest rates, to prevent consumer exploitation and risky lending.

Question 8

What Are The Problems With Financial Market Regulation?
(4 Points)

Answer 8

~ Moral hazards.

~ Regulatory capture.

~ Asymmetric information.

~ Enforcement costs.