Question

Specify all the goals of the CB. Explain why almost all CB's around the world decide to focus on price-stability .

Answer 1

The central bank has been described as the "lender of last resort," meaning it is responsible for providing funds to its nation's economy when commercial banks can not cover a shortage of supplies. In other words , the central bank is preventing failure of the country's banking system.

However, the primary goal of central banks is to provide price stability by controlling inflation in the currencies of their countries. A central bank also acts as the regulatory authority for the monetary policy of a country, and is the sole supplier and printer of circulating notes and coins. Time has shown that the central bank can better work in these capacities by remaining independent of government fiscal policy, and therefore uninfluenced by any regime's political concerns. Any commercial banking interests should also be completely divested of a central bank.

Price stability aims show a deep aversion to Inflation that the various sectors of society share.
Aversion suggests inflation would impose significant costs on Economics. Although the reasons for these costs are intuitively clear, their actual size is not so obvious, as The quantitative estimates seem especially difficult to obtain.

The central bank, which is responsible for price stability, must regulate the level of inflation by controlling money supplies through monetary policy. The central bank conducts open-market operations (OMOs) that either inject liquidity into the market or absorb extra funds, directly affecting inflation levels. The central bank can buy government bonds, bills, or other government-issued notes to increase the amount of money in circulation and decrease the interest rate (cost) for borrowing. However, the purchase may also lead to higher inflation The central bank will sell government bonds on the open market when it wants to absorb capital to reduce inflation, which increases interest rates and discourages borrowing. The main means by which a central bank regulates inflation, money supply and prices are open market operations.