4.4.3 Role of central banks

Question 1

Whats the central bank’s relationship with the government?

Answer 1

• Banker to the Government - Hold the Govt’s bank account and debt and loan to them as well as holding gold and foreign exchange reserves.

Question 2

How does the central bank regulate the financial system?

Answer 2

• Regulates the financial system - Usually prevent financial instituions from undertaking activities that harm consumers or are deemed too risky. This can include banning market rigging, preventing the sale of unsuitable products and maximum interest rates to prevent risk or exploitative behaviour.

Question 3

How does the central bank control Monetary Policy?

Answer 3

• Controls Monetary Policy - through interest rates (base rate) and controlling money supply in order to keep inflation low and stable.

Question 4

How is the central bank a “Bank to other Banks”?

Answer 4

• Bank to other Banks - Banks deposit their money within the central bank so accounts can be regulated and levelled (If a consumer deposits a cheque in one bank it goes to another). They are also the lender of last resort.