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A central bank is largely referred by economists as the bank at the apex with monetary authority. Clearly explain the major functions of a central bank.

      

A central bank is largely referred by economists as the bank at the apex with monetary authority.
Clearly explain the major functions of a central bank.

  

Answers

Wilfred
Governments need to hold their funds in an account into which they can make deposits and against
which they can draw cheques. Such government deposits are usually held by the Central Bank.
Commercial banks need a place to deposit their funds; they need to be able to transfer their funds among
themselves; and they need to be able to borrow money when they are short of cash.

The Central Bank accepts deposits from the commercial banks and will on order transfer these deposits
among the commercial banks. Consider any two banks A and B. On any given day, there will be cheques
drawn on A for B and on B for A. If the person paying and the person being paid bank with same bank,
there will be a transfer for money form the account or deposit of the payee. If the two people do not
bank with the same, such cheques end up in the central bank. In such cases, they cancel each other out.
But if there is an outstanding balance, say in favor of A then A?s deposit with the
central bank will go up and B?s deposit will go down. Thus the central bank acts as the
Clearing House of commercial banks.

Commercial banks often have sudden needs for cash and one way of getting it is to borrow from the
central bank. If all other sources failed, the central bank would lend money to commercial banks with
good investments but in temporary need of cash. To discourage banks over-lending, the central bank will
normally lend to the commercial banks at high rate of interest which the commercial bank passes on to
the borrowers at an even higher rate. For this reason, commercial banks borrow from the central bank as
the lender of the last resort.

The Central Bank acts as the Government?s representative in international financial negotiations
eg. with international organizations like the World Bank, the International Monetary Fund, The Donor
Consultative Meeting, The Paris Club etc.

It is responsible for the sale of Government Securities or Treasury Bills, the payment of interests on
them and their redeeming when they mature.

The central bank is also responsible for the implementation of monetary policies.Monetary policy is the
regulation of the economy through the control of the quantity of money available and through the price
of money i.e. the rate of interest borrowers will have to pay. Expanding the quantity of money and
lowering the rate of interest should stimulate spending in the economy and is thus expansionary, or
inflationary. Conversely, restricting the quantity of money and raising the rate of interest should have a
restraining, or deflationary effect upon the economy

Wilfykil answered the question on February 6, 2019 at 11:32

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