Central Banks And Monetary Policy

Question 1

Main roles of a central bank?

Answer 1

Monetary policy
- Central banks set interest rates and control the money supply to influence the economy.

Financial stability
- Central banks work to ensure the stability of the financial system by regulating banks and other financial institutions

Managing the currency
- Central banks print and issue currency, manage its value, and oversee its distribution.

Lender of last resort
- Central banks act as a lender of last resort, providing emergency loans to banks and other financial institutions during times of
crisis.

Financial supervision
- Central banks supervise the financial system to ensure that financial institutions are operating safely and following regulatory requirements.

Research
- Central banks conduct economic research and analysis to inform their policy decisions.

Examples: Bank of England, ECB, the Fed in USA

Question 2

What is the Base Rate?

Answer 2

The main interest rate set by a nation’s central bank.

The rate of interest charged to commercial banks if they must borrow from the central bank when short of liquidity

Question 3

What is a Market Interest Rate?

Answer 3

The rates for savings, bank overdrafts, mortgages, credit
cards, pay day loans etc.

Market interest rates often take their cue from changes in the Base Interest Rate

Question 4

What does ‘lender of the last resort’ refer to?

Answer 4

When other financial institutions are unable to provide loans, the central
bank steps in to lend money to banks/financial institutions.

• Central banks provide emergency loans to financial institutions in times of crisis to prevent their collapse and limit systemic risk.

Question 5

What are Bank Reserve Requirements?

Answer 5

The central bank can change the amount of money banks must have in reserve to ensure banks have enough liquidity to meet the needs of their customers.

*The UK does not have these but sets
‘stress tests’ to check t

Question 6

The central bank makes decisions on ____ ______& __ to meet its remit; in the UK the Bank of England has to aim to meet the 2% inflation target in the medium term.

Answer 6

base rates & QE