| What are the 2 Essential Roles for the Central Bank? | -Act as a Banker to the Government
-Act as the Lender of Last Resort |
| Why is the Central Banks role of being the Lender of Last Resort so Crucial in an Economy? | -If a Bank borrows Short Term but Lends Long Term, they can face a Shortage of Liquidity. The Central Bank can Lend Money to ensure they don't Collapse
-The Bank of England has a Predictable and Routine Scheme to Provide Liquidity. Also, there are Emergency Schemes too
-The Interest Rates on Emergency Funds make an Incentive for the Bank to Behave |
| What Advantages do Central Banks being the Lender of Last Resort have? | -Helps to prevent Panic and a Run on the Banks
-Reduces the Impact of Financial Instability |
| What Disadvantages do Central banks being the Lender of Last Resort have? | -Leads to Moral Hazard and Banks to take High Risks
-Banks not holding Sufficient Liquidity
-Unfair that the Central Bank will help Financial Institutions but not Non-Financial Institution |
| How can Central Banks act as the Banker to the Government | -A Central Bank helps the Government manage the National Debt. This may involve Issuing Government Bonds
-It also can offer Advice to the Government on Economic Matters, and help in Negotiating with International Financial Organisations
-Note: It is the Debt Management Office, NOT the Bank of England, that issues Gilts (Gov Bonds) The Bank of England does play a Huge Role however in Facilitating the Transaction and Banking Services |
| How can Central Banks help Regulate the Financials Sector? | -Central Banks can Impose Rules to Prevent Financial Market Failure and Instability. This helps create Macroeconomic Stability in the Economy |
| How can Central Banks implement Monetary Policy? | -The Central Bank can Manage the Money Supply via affecting the Availability of Credit and its Cost. This is done via Interest Rates or Quantitative Easing
-Capital Requirements can also be Set up, affecting the amount of Loans that Banks can issue
-The Exchange Rate can also be Influenced, by Selling and Buying Currencies and Changing the Interest Rate
-Responsible for Issuing Banknotes and making the Confidence in the Currency is Maintained |
