Question

List three functions of a country’s central bank:

1.)

2.)

3.)

Answer 1

The 3 Major functions of central banks are:

1.   Making and conducting the monetary policy

2.   Regulate the Banks

3.   Providing financial services and economic research

Let us explain these functions in brief

1.   Making and conducting the monetary policy-

The 3 main goals of a central bank are to stabilize the currency, increase employment and prevent inflation. The monetary policy provides them with 3 tools to achieve this goal:

·   Setting the reserves requirement for the banks helps control the liquidity in the system

·   The also use open market operations (buying and selling of securities) to control the liquidity

·   Changing the interest rates also helps controlling the liquidity. Increase in rates to prevent inflation and decrease in rates to foster growth but it can lead to a rise in inflation, so the central bank keeps changing the rates to balance growth, employment and inflation

2.   Regulation of banks-

·   Central banks regulate the other banks and NBFC’s in the country by setting reserve requirements for them so that they are able to cover for the potential NPA’s and this will ensure financial stability of the banks ,which will ensure the protection of depositors funds. It also regulates the banks through other rules and regulations set by central banks

3.   Providing financial services and economic research-

·   The central bank also functions as a bank for other banks of the country by lending money to other banks.

·   The central banks manage the foreign exchange reserves and also use it to change exchange rates (PEG- Helps the exporters by keeping their prices competitive with other nations)

·   They also make reports which help the government in making fiscal decisions. Examples of such reports in USA are Beige Book etc.