Theme 4.4.3

Question 1

Describe central banks

Answer 1

Central banks are crucial institutions in modern economies, responsible for various functions that help maintain economic stability and support the financial system

Question 2

Name the 4 roles of central banks

Answer 2

Implementation of Monetary Policy

Banker to the Government

Banker to the banks - Lenders to last resort

Role in Regulation of the Banking Industry

Question 3

Implementation of Monetary Policy

Answer 3

involves managing the money supply and interest rates to achieve specific economic objectives, such as price stability and economic growth.

Tools of monetary policy include open market operations (buying and selling government securities), setting interest rates (e.g., the policy rate), and reserve requirements for banks.

They adjust these tools to influence borrowing costs, inflation rates, and overall economic activity

Question 4

Banker to the Government

Answer 4

They act as the gov’s banker by managing the gov’s bank accounts, facilitating payments, and helping with debt issuance and management.

They often oversee the issuance and redemption of gov bonds and treasury bills, helping the gov fund its operations and manage its debt.

They also provide advice on fiscal and monetary coordination to ensure overall economic stability.

Question 5

Banker to the Banks – Lender of Last Resort

Answer 5

Central banks serve as a lender of last resort to financial institutions, especially during times of financial crises or bank runs.

In this role, central banks provide emergency funding to banks facing liquidity problems to prevent systemic financial instability.

By offering short-term loans (often referred to as the discount window), central banks help maintain confidence in the banking system.

Question 6

Role in Regulation of the Banking Industry

Answer 6

Central banks often play a critical role in supervising and regulating the banking sector to ensure its stability and soundness.

They set and enforce prudential regulations, including capital adequacy requirements and risk management standards, to prevent excessive risk-taking by banks.

Central banks may also conduct regular bank examinations to assess the financial health and compliance of financial institutions with regulatory standards.

Question 7

AO2- 2008 financial crisis bailout

Answer 7

US central bank spent $700bn of tax payer’s money to bail banks

Question 8

Define negative externality

Answer 8

Costs which affect third parties outside the price mechanism