Role of the central bank

Question 1

Give five functions that central banks often perform.

Answer 1

• issue of coins and banknotes
• banker to commercial banks
• regulating financial system
• managing government borrowing
• managing foreign exchange reserves

Question 2

What is the UK’s central bank?

Answer 2

Bank of England

Question 3

Define monetary stability.

Answer 3

when there is price stability relative to government’s inflation target

Question 4

Define financial stability.

Answer 4

when there is sufficient and efficient flow of liquidity in economy

Question 5

Define lender of last resort.

Answer 5

role of central bank in guaranteeing sufficient liquidity is available in the monetary system

Question 6

What is the Monetary Policy Committee (MPC)?

Answer 6

body within the Bank of England responsible for conduct of monetary policy

Question 7

What is the key lever used by the Bank of England to control inflation?

Answer 7

Bank Rate (ie interest rates)

Question 8

What is the primary responsibility of the MPC?

Answer 8

meeting inflation target

Question 9

What is the secondary responsibility of the MPC?

Answer 9

supporting government’s economic policy, eg objectives for economic growth and employment

Question 10

What is the UK government’s inflation target?

Answer 10

2% pa change in the Consumer Price Index (CPI)

Question 11

What is the Bank Rate?

Answer 11

rate of interest charged by Bank of England on short-term loans to other banks

Question 12

What are open market operations?

Answer 12

intervention by central bank to influence short-term interest rates by buying or selling securities

Question 13

How could the Bank of England intervene to prevent short-term interest rates rising?

Answer 13

via open market operations, buying securities to increase liquidity

Question 14

What is quantitative easing?

Answer 14

when liquidity in economy is increased by central bank buys assets, eg government bonds, from commercial banks

Question 15

Does quantitative easing increase or reduce the money supply?

Answer 15

increase (as money created to pay to commerical banks for securities)

Question 16

Between 2000 and 2019, when was there negative economic growth in the UK?

Answer 16

2008-10

Question 17

What is the PRA?

Answer 17

Prudential Regulation Authority, part of the Bank of England

Question 18

What is the PRA responsible for?

Answer 18

microprudential regulation of deposit-takers, investment firms and insurers

Question 19

What is the FPC responsible for?

Answer 19

macroprudential regulation

Question 20

Define microprudential regulation.

Answer 20

financial regulation to set standards and supervise financial institutions at level of individual firm

Question 21

What is the Financial Policy Committee (FPC)?

Answer 21

decision making body of the Bank of England

Question 22

Define macroprudential regulation.

Answer 22

financial regulation to mitigate the risk of the financial system as a whole

Question 23

What is the Financial Conduct Authority (FCA)?

Answer 23

the body responsible for conduct regulation of financial services firms

Question 24

When was quantitive easing first introduced by the Bank of England?

Answer 24

2009 following financial crisis

Question 25

What is the *Bank for Institutional Settlements*?

Answer 25

an institution that acts as a bank for central banks and sets global standards for regulation of banks

Question 26

Since 2000, over what period was the Bank Rate under 1%?

Answer 26

2009-2022

Question 27

Why was the Bank Rate increased in 2022?

Answer 27

because inflation was rapidly increasing (largely due to Russia invading Ukraine)