HAGAD, ANGELICA C.

BSBA 2-B
Study Guide 5

How Central Banks Originated and their Role Today

Learning Activity 1: Individual Activity

a. What are the functions of central bank?

A central bank is an independent national authority that conducts monetary policy, regulates
banks, and provides financial services, including economic research. Its goals are to stabilize the
nation's currency, keep unemployment low, and prevent inflation.

Functions of the Central Bank

 Currency regulator or bank of issue.
 Bank to the government.
 Custodian of Cash reserves.
 Custodian of International currency.
 Lender of last resort.
 Clearing house for transfer and settlement.
 Controller of credit.
 Protecting depositors interests.

b. What are the objectives of central banks?

The main objective of a central bank is to ensure financial stability. Depending on the country,
central banks might have other objectives such as controlling inflation, unemployment, interest
rates, or exchange rates. However, all these objectives are in line with the main objective of
ensuring financial stability.

The central banks objectives include:

 Price Stability
Price stability is probably one of the leading objectives of central banks. Central banks
aim to keep prices stable so consumers are confident prices will not increase or
decrease rapidly and change their behaviours aburptly.

 Full Employment
full employment is still a relatively important objective. Most central banks would take
action if unemployment starts creeping up. Usually, this is done by lowering the interest
rates to fuel cheaper credit to businesses. In turn, businesses would use the cheap
credit to invest and expand its operations, thereby stimulating jobs in the process.

 Financial Stability
The central bank often acts as lender of last resort in order to maintain financial
stability. For instance, most commercial banks need short-term loans in order for them
to be able to align their assets and liabilities.
  Economic Growth
Economic growth is important to central banks as it generally means more jobs and
better living conditions. When there is economic growth, it is often associated with
increased business investment, improving employment, and increasing demand.

Now economic growth is an objective for central banks but is not necessarily its main
one. They often have to weigh up the pros and cons, as controlling inflation and prices
may be more beneficial than stimulating the economy.

 Exchange Rate Stability

Exchange rate instability can lead to lower levels of business confidence as they are
unable to adequately plan their investments or business strategy. This is an even more
important factor in todays inter-connected economies that rely heavily on international
supply chains.
Self-reflection: Schema Maps

TOPIC: CANTRAL BANK

Schemas A central bank controls the supply of money as well as how it

reaches the consumer. It can not only print and inject money into
the economy but also regulate how commercial banks distribute
it.
New Learnings The central bank’s main functions are to set the base rate, control
the money supply through open market operations, set private
banks reserve requirements, and control the nations foreign
exchange reserves and the main objectives of the central bank is
to maintain price and economic stability.
Misconceptions