Question

1- The relationship between Liquidity & Solvency

2- The main functions of a Central Bank.

Answer 1

Liquidity and Solvency are ways to measure the ability of an entity to pay its debts. they cannot be used interchangeably as they are different in scope and purpose. While solvency refers to the entity long-term financial position, meaning the ability of the entity to meet long-term financial commitments, while liquidity is the ability of a business to meet its short-term obligations.

A Central Bank is an integral part of the financial and economic system. They are usually controlled by the government. The functions of central bank include printing money, operating monetary policy, the lender of last resort and ensuring the stability of financial system.

1. Issue money. The Central Bank issue adequate amount of notes and coins as printing too much can cause inflation.
2. Lender of Last Resort to Commercial banks. If banks get into liquidity shortages then the Central Bank is able to lend the commercial bank enough funds to avoid the bank running short. This helps to maintain confidence in the banking system.
3. Maintain a certain level of inflation. Many governments give the Central Bank a target for inflation. Usually this level of inflation helps to create greater economic stability and sustains the value of money and savings.
4. Target growth and unemployment. Central Bank also considers other macroeconomic objectives such as economic growth and unemployment.
5. Ensure stability of the financial system. Regulate bank lending and checks on the books of bank.