The role of the central bank is to manage a country's monetary policy from "summary" of How Finance Works by Mihir Desai
The central bank plays a crucial role in safeguarding a country's monetary stability through the management of its monetary policy. This responsibility entails overseeing the money supply, interest rates, and the overall financial system to ensure economic stability and growth. One of the primary tools at the central bank's disposal is setting interest rates, which influences borrowing, spending, and investment decisions. By adjusting interest rates, the central bank can stimulate or cool down the economy as needed. Lowering interest rates, for example, can encourage borrowing and spending, thus boosting economic activity. Conversely, raising interest rates can help prevent inflation by curbing excessive spending. In addition to interest rates, the central bank also manages the money supply, which refers to the amount of money circulating in the economy. By controlling the money supply, the central bank can regulate inflation and deflation. In times of economic growth, the central bank may increase the money supply to support increased spending. Conversely, during periods of high inflation, the central bank may reduce the money supply to curb rising prices.- The central bank acts as a lender of last resort, providing emergency funding to banks facing liquidity issues. This function helps maintain financial stability and prevents bank runs. By ensuring the solvency of banks, the central bank plays a crucial role in safeguarding the overall health of the financial system.
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