Central Bank

A central bank is a national or regional institution that manages a country’s currency, money supply, and interest rates. It is responsible for regulating the banking system, maintaining financial stability, and implementing monetary policy to control inflation, stabilize the currency, and support economic growth. Central banks also serve as the lender of last resort to banks during financial crises. Major functions include issuing currency, setting interest rates, managing foreign exchange reserves, and regulating commercial banks.

Example

The U.S. Federal Reserve adjusts interest rates to control inflation and stimulate or slow down economic growth as needed, using tools like the federal funds rate.

Key points

• A central bank manages a country’s money supply, currency, and interest rates.

• It implements monetary policy to control inflation, stabilize the economy, and promote growth.

• Central banks regulate commercial banks and act as a lender of last resort during crises.

Quick Answers to Curious Questions

What are the key roles of a central bank?

Key roles include controlling inflation, managing the money supply, setting interest rates, issuing currency, and regulating commercial banks.

How does a central bank influence the economy?

By adjusting interest rates and controlling the money supply, a central bank can influence economic growth, inflation, and employment levels.

What is a central bank’s role during a financial crisis?

It acts as a lender of last resort, providing liquidity to banks and financial institutions to stabilize the economy and prevent systemic failures.