Role of the central bank

Question 1

What is the role of central bank?

Answer 1

• Implement monetary policy
• Act as a banker to the government - to set interest rates they must alter money supply, and buy/ sell government bonds.
• Act as a banker to the banks - act as lender of last resort to prevent bank failure
• Regulate the financial system -

Question 2

What role of the CB acts as a financial stability role?

Answer 2

act as banker to the banks, regulate the financial system.

Question 3

Why is financial stability important?

Answer 3

• prevent panic
• reduce financial instability
• advice the government of bank bailouts

Question 4

What is the problem with the function of financial stability?

Answer 4

• moral hazard (may hurt third parties as banks won’t have enough liquidity)
• banks may never hold sufficient liquidity (dependant on bank)
• regulatory capture - regulators may be influenced as they have friends in the industry (corrupt - like lower interest rates or regulations)
• why should banks be helped out during crises when other firms don’t have this luxury? (unfair)