Los 15.a

Question 1

What are the key roles of central banks?

Answer 1

**Sole Supplier of Currency: Central banks have the exclusive authority to issue money, which is fiat money (not backed by a tangible asset but accepted by law).

Banker to the Government and Other Banks: They provide banking services to the government and other banks, managing accounts and facilitating transactions.

Regulator and Supervisor of Payments System: They regulate the banking system, set risk-taking standards, and oversee the payments system to ensure smooth transactions domestically and internationally.

Lender of Last Resort: Central banks supply liquidity to banks facing shortages, preventing bank runs and ensuring financial system stability.

Holder of Gold and Foreign Exchange Reserves: They hold the nation’s gold and foreign currency reserves, which help stabilize the currency and manage exchange rates.

**

Question 2

What is the primary objective of central banks?

Answer 2

The primary objective of a central bank is to control inflation and promote price stability. Stable prices are essential for economic confidence, as high inflation can lead to menu costs (businesses changing prices constantly) and shoe leather costs (individuals making frequent trips to the bank to avoid holding depreciating cash).

Question 3

What other goals do central banks often have?

Answer 3

Stability in exchange rates with foreign currencies

Full employment

Sustainable positive economic growth

Moderate long-term interest rates

Question 4

What does it mean when a country pegs its currency to another, such as the U.S. dollar?

Answer 4

When a country pegs its currency to another (e.g., the U.S. dollar), it sets a fixed exchange rate. The central bank manages this by buying or selling its currency to maintain the peg. This can help stabilize the currency in the short term but requires managing interest rates and economic activity to maintain over time.