Functions of the Central Bank
-The Central Bank has the sole authority to issue notes and coins.
-The Central Bank is a banker to the government as it keeps the government accounts.
-It manages the national debt.
-It is a banker to all banks as commercial banks must keep an account with the central bank.
-A lender of last resort-The commercial banks and all other financial institutions can count on the central bank for financial assistance.
-It is a financial agent for government. The government uses the Central Bank to carry out its economic policies. These policies are known as monetary policies.
These are policies used to affect the level of the money supply to bring about high employment, price stability and sustainable economic growth. The money supply is composed of notes and coins in circulation plus deposits in commercial banks. If this supply is too high then inflation will occur. If the supply is too low the economy may experience an economic depression.
Decreasing the money supply
When the money supply is too high monetary policies such as high interest rates, selling certificates of deposits and treasury bills and increasing the cash reserve ratio are used to discourage borrowing and spending.
Increasing the money supply
To increase the money supply the opposite must be done. Monetary policies such as low interest rates, buying securities from other financial institutions and decreasing the cash reserve ratio are used to encourage borrowing and spending. When interest rates are lowered citizens will borrow funds and reduce savings to purchase assets and consumption items. This will increase the money supply in the economy. The government may wish to increase the money supply to boost an economy when there is an economic decline. As the money supply rises demand for goods and services will rise resulting in the expansion of the business sector and the level of employment.