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Finance and Accounting : Monetry - Central Bank - Research Paper Example

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Finance and Accounting : Monetry - Central Bank

Reckless and fraudulent behaviors of other financial institutions and banks are prevented as the central banks have the supervisory powers (Padoa-Schioppa, 2002). The goals of central banks are generally specified as price stability, stable real growth, financial stability, interest rate and exchange rate stability. 1. Discuss briefly the five objectives of central banks. Following are the main five objectives of a central bank: Price Stability The objective of a central bank is to ensure the stability of the prices of the good and services in a country. Inflation will occur in case if central bank injects money into the economy by using different means and consequently if the money from the market is taken back by the bank it will result in to deflation. Central bank insures the price stability by eliminating the inflation and the deflation factors so the average price should neither fall nor rise on an average (Padoa-Schioppa, 2002). Stable Real Growth The importance of this objective of a central bank can be understood in a way that the whole economy is dependent on the stable real growth. Central bank has to ensure that the real growth should remain stable is further influenced by the price stability. ...
The interest rate and the supply of money are the tools that are mainly used to regulate the financial structure (Dennis & Richard, 1981). Interest Rate Stability Central bank controls the interest rate as when central bank reduces the reserve amount then the commercial banks get more money to offer for loan which makes the interest rates to lower down and when central bank increases the reserve amounts then the commercial banks have less money to offer for loan which makes the interest rates to jump high. So certain polices are made to make the interest rate stable for financially strong economy (Dennis & Richard, 1981). Exchange Rate Stability Stabilizing the exchange rate is another critical role that is played by the central bank. All the above factors and many other factors including import, export, demand and supply etc. play there part in determining the exchange rate. Also all these factors are dependent on the policies and actions of a central bank. So to stabilize the exchange rate of a country, central bank should have to stabilize these factors first (Dennis & Richard, 1981). 1.1. In their pursuit of maintaining price stability, central banks are said to manage the money supply process. There is numerous method or ways used by the central banks to increase or decrease the amount of money in the country and the banking system. The steps taken by the central bank for this sort of actions are generally known as monetary policy. There are three ways a central bank can inject or withdraw money from the country in order to maintain price stability (Christopher, 1984). Money supply can be modified by changing the reserve requirements of commercial banks. Reserve amount is ...Show more
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Summary

Introduction A central bank or a reserve bank is a public/ government owned institution which mainly issues currency, regulates the supply of money and also controls the country’s interest rate is also known as monetary authority. Its other duty includes overseeing the commercial banking system of their respected countries…
Finance and Accounting Research Paper: Monetry - Central Bank
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