a)The central bank(CB)

The main objective of central banks (CB) is to control inflation in order to

maintain stable exchange rates for the national currency. A nation's financial

regulations are overseen by the central bank (CB), which is also the primary maker

and caretaker of the notes and coins that are in circulation.

Time has proven that the central bank can best fulfill these functions by acting

independently of budgetary policy and, as a result, being unaffected by any

government's political issues. The commercial lending activities of a central bank

should likewise be fully unloaded.

Importance of CB

Since the central bank (CB) is in responsibility of maintaining market stability, it

must control bank reserves through monetary policy in order to control the rate of

inflation. The reserve bank engages in open market operations that directly affect

the rate of inflation by either absorbing surplus funds or injecting liquidity into the

economy.

In order to increase the amount of money in circulation while lowering the rate of

interest on borrowing, the central bank (CB) may purchase government bonds,

notes, or other government notes. However, this buying could result in higher

inflation. The central bank will actually sell bonds on the open market when it has
to absorb money to reduce inflation, which raises interest rates and discourages

borrowing.

b) A measure of how free financial institutions are from governmental control is

central bank (CB) independence. Independent grows when central banks are

composed of individuals who serve lengthy, non-renewable terms and when a

reserve bank has complete control over its own resources. Independent cannot be

destroyed or changed by simple regulations. Researchers have discovered that a

central bank can tolerate lower inflation without jeopardizing its ability to achieve

economic or employment goals the more autonomously it operates. When it occurs

unexpectedly, inflation transfers funds from net lenders to net borrowers, creates

uncertainty, raises nominal interest rates, and stifles economic growth.

The beneficiaries of responsible central banks are the owners of banks, companies,

and net creditors who suffer from high inflation.