Chapter-16

Question 1

What is money?

Answer 1

An item which is generally acceptable as a means of payment.

Question 2

What are commercial banks?

Answer 2

Commercial banks are banks that aim to make a profit by providing a range of banking services to households and firms.

Question 2

What are the four functions of money?

Answer 2

i) Medium of exchange

ii) Store of value

iii) Unit of account

iv) Standard of deferred payments.

Question 3

What is liquidity?

Answer 3

Liquidity refers to the ability to turn an asset into cash quickly without a loss.

Question 4

What role does a central bank play in an economy?

Answer 4

i) Acting as a banker to the government by managing tax revenues and government payments.

ii) Serving as a banker to commercial banks, enabling them to settle debts and manage cash flow.

iii) Acting as a lender of last resort, lending to banks temporarily short of cash.

iv) Managing the national debt by issuing government securities and repaying them.

v) Holding reserves of foreign currency and gold to influence the exchange rate.

vi) Issuing banknotes and coins, and managing currency circulation.

vii) Implementing the government’s monetary policy, including controlling inflation and interest rates.

viii) Controlling the banking system by regulating and supervising banks.

ix) Representing the government in meetings with other central banks and international organizations.

Question 4

What is a central bank?

Answer 4

A central bank is a government-owned bank that provides banking services to the government and commercial banks and operates monetary policy.

Question 5

What is the role of a central bank as a lender of last resort?

Answer 5

The central bank acts as a lender of last resort by providing loans to commercial banks that are temporarily short of cash.