4.5.1 Role of Central Banks

• Central banks control the money supply to influence inflation and economic growth.

  True
• Central banks act as a lender of last resort during periods of financial distress
• Order the roles of central banks in setting interest rates:

  1️⃣ Determine the base rate

  2️⃣ Use open market operations

  3️⃣ Specify reserve requirements
• What happens to consumer spending and investment when interest rates are lowered by a central bank?

  Increases
• Match the method used by central banks with its effect on money supply:

  Open Market Operations (OMO) ↔️ Buying bonds increases money supply

  Reserve Requirements ↔️ Increasing requirements decreases money supply

  Discount Rate ↔️ Lowering rate increases money supply
• Central banks use monetary policy to control money supply and set interest rates to influence inflation and economic growth.
• Central banks ensure the stability of the banking system by enforcing regulations and managing risks.


  True
• Which central bank provided loans to struggling banks during the 2008 financial crisis?

  Federal Reserve
• Match the central bank role with its description:

  Setting Base Rate ↔️ Determines the interest rate for bank borrowing

  Open Market Operations ↔️ Buys or sells government bonds

  Reserve Requirements ↔️ Specifies deposit percentage banks hold
• Open market operations can stimulate economic growth by increasing the money supply.

  True
• Why do central banks manage the money supply?

  Influence economic growth
• Raising reserve requirements increases the amount of money banks can lend.

  False
• Match the method with its effect on money supply:

  Open Market Operations ↔️ Buying increases, selling decreases

  Reserve Requirements ↔️ Increasing decreases, decreasing increases

  Discount Rate ↔️ Lowering increases, raising decreases
• Raising interest rates can help control inflation but may slow economic growth.


  True
• Central banks are responsible for managing a country's monetary
• What do central banks determine benchmark interest rates to affect?

  Borrowing costs
• Monetary policy is used by central banks to influence inflation and economic growth.


  True
• What role do central banks play during financial crises as a lender of last resort?

  Provide emergency loans
• Lowering the base rate by a central bank increases borrowing costs for commercial banks.

  False
• Open market operations involve buying or selling government bonds
• Lowering the discount rate encourages banks to borrow more from the central bank.

  True
• What is the role of a central bank as the lender of last resort?

  Emergency loans to banks
• What is the primary goal of financial stability managed by central banks?

  Prevent financial system collapse
• Central banks influence borrowing costs for individuals and businesses by setting interest rates.
• How does setting a base rate affect borrowing costs for commercial banks?

  Increases or decreases costs
• The Bank of England influences consumer and business borrowing costs by setting its base rate.
• Steps in managing the money supply using Open Market Operations:

  1️⃣ The Federal Reserve buys bonds

  2️⃣ Money supply increases

  3️⃣ Interest rates lower
• What is the discount rate in central banking terms?

  Rate banks borrow from central bank
• Lowering interest rates reduces borrowing costs, encourages spending, and can stimulate economic growth.
• Steps in the chain of effects when the Federal Reserve lowers interest rates:

  1️⃣ Borrowing costs decrease

  2️⃣ Consumer spending increases

  3️⃣ Economic growth is stimulated

  4️⃣ Inflation may rise
• What may happen if the economy overheats after interest rates are lowered?

  Higher inflation