Question

Write the definition of 'central bank'. Describe the various functions of a central bank.

Hint:

The central bank plays a critical role in stabilizing the economy through monetary policies and financial regulation.

Answer 1

The central bank is the apex financial institution responsible for regulating the monetary and banking system of a country. For example, the Reserve Bank of India (RBI) is India's central bank. Functions of a Central Bank: \[\begin{array}{rl} 1. & \text{Monetary Authority: Formulates and implements monetary policy.} \\ 2. & \text{Currency Issuance: Sole authority to issue the national currency.} \\ 3. & \text{Lender of Last Resort: Provides liquidity to banks in times of financial distress.} \\ 4. & \text{Foreign Exchange Management: Manages exchange rates and foreign reserves.} \\ 5. & \text{Regulator of Banking System: Ensures the stability and efficiency of banks.} \\ 6. & \text{Government's Banker: Maintains the accounts and handles transactions of the government.} \\ \end{array}\]