explain the role of the central bank in economic growth

Expert Solution

Needless to say that the main role of central bank is to issue currency notes which acts as a monopoly. It is also a banker's bank and lender of last resort.

One of the main role of central bank in economic development is to create and lend to financial institutions. These institutions are required to provide the large credit facilities and mostly are located in metro or larger cities in underdeveloped countries.

Also there is a tremendous need to balance demand and supply of money. Excess of money will denote inflation whereas shortage of money will inhibit growth.

The central bank helps to solve the problem of balance of payments (BOP) as these problems lead to difficulty in achieving set targets.

The central Bank also can reduce the Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR).

Also Central bank plays a vital role in structuring the interest rate. A low interest rate is required to motivate the private investment in agricultural activities. The farmers will not afford to pay higher interest rate. Also low rate of interest encourages public investment.

jeff jeffy answered 2 years ago

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