Which best describes a central bank’s primary goals?

A financial institution that has been granted privileged control over the production and distribution of money and credit for an entire nation or a group of nations is known as a central bank. In most contemporary economies, the formulation of monetary policy as well as the regulation of member banks is typically the responsibility of the central bank.

The Federal Reserve System and other central banks are examples of institutions that are not market-based and may even be anti-competitive. Central banks are frequently hailed for their political autonomy, despite the fact that some of them are nationalized and others are not affiliated with any government agency. Nevertheless, a central bank’s privileges continue to be established and protected by law even in the event that the bank is not legally owned by the government.

Which best describes a central bank’s primary goals?

A. Limiting inflation and reducing unemployment
B. Reducing unemployment and maintaining cash flow
C. Controlling stagflation and reducing unemployment
D. Managing credit and ensuring the money supply’s liquidity

Option A best describes the primary goal of a central bank’s primary goals. This is because the primary responsibilities of a central bank are to exercise authority over, regulate, and set up the nation’s monetary and banking systems. In addition to this, it is accountable for ensuring the country’s continued fiscal soundness and unquestioned economic autonomy.

which best describes a central bank's primary goals

Structure of a central bank

Below is a structure of employees’ positions and ranks of a central bank.

Which best describes a central bank's primary goals

Functions of the central bank

  • Banker and financial adviser to the Government
  • Regulator of Currency
  • Foreign Exchange Reserves
  • Cash Reserves of Commercial Banks

Banker and financial adviser to the Government

The primary responsibilities of a central bank are to exercise authority over, to regulate, and to set up the nation’s monetary and banking systems. Additionally, it is accountable for ensuring the continuity of the economy and the financial system. 3. Depository for the Cash Reserves of Commercial Financial Institutions

By law, commercial banks are obligated to maintain reserve balances that are equivalent to a predetermined percentage of their liabilities related to time deposits and demand deposits held at central banks. The central bank transfers funds from one bank to another in order to facilitate the clearing of cheques, and it does so on the basis of these reserves.

Therefore, the role of “custodian” of commercial banks’ cash reserves is played by the central bank, which also assists in facilitating commercial banks’ transactions. According to De Kock, there are a great many benefits to keeping the cash reserves of the commercial banks with the central bank.

To begin, one of the most important factors that contribute to the robustness of a nation’s banking system is the concentration of cash reserves within the country’s central bank. Second, having centralized cash reserves can provide the foundation for a credit structure that is both expansive and more elastic than it would be if the same amount were distributed among the various individual banks.

Thirdly, centralized cash reserves have the potential to be utilized to their fullest extent and most effectively in times of seasonal strains as well as in times of financial emergencies or crises. Fourthly, the central bank has the ability to control the amount of credit that is created by commercial banks by manipulating these cash reserves. Last but not least, in order to help commercial banks get out of their current financial bind, the central bank has the ability to lend them additional funds on a temporary and short-term basis. the nation’s unquestioned political authority.

See also: Employment

which best describes a central bank's primary goals

Regulator of Currency

The bank that issues currency is known as the central bank. It has a monopoly on the production of notes. Notes issued by it are accepted as legal tender in financial transactions. It has a department called “issue” that is in charge of supplying commercial banks with banknotes and coins. The United States Mint is responsible for the production of coins, but the Central Bank is the institution that releases them into circulation.

Throughout the world, national central banks have adhered to a variety of distinct methodologies for the issuance of currency notes. The law stipulates that the central bank must store a certain quantity of gold as well as foreign securities as collateral for the issuance of notes. In certain nations, a predetermined percentage—anywhere from 25 to 40 percent of the total notes issued—is assigned to the amount of gold and other foreign securities held by the central bank.

The fact that the central bank has a monopoly on the issuing of notes guarantees that all of the notes issued are of the same quality, which helps to make domestic trade and exchange more straightforward. It maintains equilibrium within the monetary system and instills confidence within the general populace. In response to changes in the state of the economy, the central bank has the ability to either restrict or expand the availability of cash.

As a result, it lends the monetary system some degree of adaptability. Because it has a monopoly on the production of currency notes, the central bank also exercises control over the banking system because it is the primary source of cash. Last but not least, the government is able to generate profits from the printing of notes by entrusting the monopoly of note issues to the central bank. This allows the government to print notes at a cost that is relatively low in comparison to the face value of the notes.

Foreign Exchange Reserves

The nation’s foreign exchange reserves are maintained and managed by the central bank of the country. It is a central depository for gold and other currencies from around the world. It does this by selling gold to the monetary authorities of other countries at predetermined prices. In addition to this, it trades in foreign currencies by buying and selling them at market prices. In addition to this, it stabilizes the exchange rates of the local currency in relation to the currencies of other nations.

It does this in order to fulfill its obligations as a member of the International Monetary Fund and in an effort to maintain stability in the market for currency exchange rates. These rates are kept within very narrow limits. In addition, it is responsible for the management of exchange control operations by providing foreign currencies to importers and individuals who are traveling to foreign countries for business, studies, or other purposes in accordance with the rules that have been established by the government.

which best describes a central bank's primary goals

Cash Reserves of Commercial Banks

By law, commercial banks are obligated to maintain reserve balances that are equivalent to a predetermined percentage of their liabilities related to time deposits and demand deposits held at central banks. The central bank transfers funds from one bank to another in order to facilitate the clearing of cheques, and it does so on the basis of these reserves.

Therefore, the role of “custodian” of commercial banks’ cash reserves is played by the central bank, which also assists in facilitating commercial banks’ transactions. According to De Kock, there are a great many benefits to keeping the cash reserves of the commercial banks with the central bank.

To begin, one of the most important factors that contributes to the robustness of a nation’s banking system is the concentration of cash reserves within the country’s central bank. Second, having centralized cash reserves can provide the foundation for a credit structure that is both expansive and more elastic than it would be if the same amount were distributed among the various individual banks.

Thirdly, centralized cash reserves have the potential to be utilized to their fullest extent and most effectively in times of seasonal strains as well as in times of financial emergencies or crises. Fourthly, the central bank has the ability to control the amount of credit that is created by commercial banks by manipulating these cash reserves. Last but not least, in order to help commercial banks get out of their current financial bind, the central bank has the ability to lend them additional funds on a temporary and short-term basis.

Share this