4.4.3 Financial Economics - Roles of Central Banks (Edexcel A-Level Economics Teaching PowerPoint)
Last updated 9 Nov 2023
This Edexcel teaching powerpoint covers Financial Economics - Roles of Central Banks
Central banks are the monetary authorities of a country and play a crucial role in managing the economy. Their main roles include:
- Monetary policy: Central banks control the money supply and interest rates in order to achieve economic goals such as stable prices, full employment, and sustainable growth.
- Financial stability: Central banks help to ensure the stability of the financial system by regulating banks and other financial institutions, supervising payment systems, and providing emergency lending in times of crisis.
- Currency management: Central banks issue and regulate the country's currency and oversee its exchange rate.
- Economic research: Central banks conduct research on economic issues and provide policymakers with economic analysis and advice.
The lender of last resort is a function performed by central banks to provide emergency lending to financial institutions in times of crisis. When banks are unable to borrow money from the market due to a liquidity crisis or solvency issues, the central bank steps in to provide short-term loans to prevent a widespread banking collapse. This helps to maintain financial stability and prevent a credit crunch, which can have devastating consequences for the broader economy. The lender of last resort function is a key tool in central banks' arsenal to maintain financial stability and prevent economic crises. However, it should be used carefully to avoid moral hazard, where banks take on excessive risk knowing that they can be bailed out by the central bank.