101 Concepts for the Level I Exam
Concept 30: Roles and Objectives of Central Banks
Roles of central bank
- Supply currency: Central banks have the sole authority to supply money.
- Banker to government and other banks: Central banks provide banking services to the government and other banks in the country.
- Regulate risk and supervise payment system: Central banks regulate the risk standards in the banking systems and monitor the payment system to ensure smooth transactions.
- Lender of last resort: Central banks can print money when the need arises.
- Repository of gold and foreign exchange reserves: Holds a country’s gold and foreign exchange reserves.
- Conducts monetary policy: Central bank controls the money supply in an economy.
Objectives of central bank
- Control inflation (primary objective): A controlled inflation level promotes price stability which is conducive to a stable economic development.
- Exchange rate stability: Countries that have their domestic currency pegged to another currency must make an effort to match its inflation rate with that country.
- Full employment: Take measures that move the economy to its full potential level of employment.
- Sustainable positive economic growth.
- Moderate long-term interest rates.