4.4.3 Central banks and monetary policy

• What are central banks responsible for overseeing in a country?

  Monetary system
• Match the function of a central bank with its description:

  Supervising commercial banks ↔️ Regulating and monitoring their activities

  Acting as lender of last resort ↔️ Providing emergency funds to banks
• The structure of a central bank varies from country to country, but it generally includes a Monetary Policy Committee
• The independent status of a central bank ensures monetary policy decisions are free from political influence.


  True
• The Monetary Policy Committee (MPC) determines monetary policy to meet economic targets
• Open Market Operations involve the buying and selling of government securities
• What does adjusting key interest rates affect in the economy?

  Cost of borrowing
• Match the monetary policy tool with its impact:

  Open Market Operations ↔️ Controls money supply

  Reserve Requirements ↔️ Affects bank lending

  Interest Rate Adjustments ↔️ Influences borrowing costs
• Open market operations involve the buying and selling of government securities
• How do interest rate adjustments affect the cost of borrowing and lending?

  Raises or lowers cost
• The Inflation Targeting Framework involves setting explicit inflation targets.

  True
• Why is transparent communication a key element of the Inflation Targeting Framework?

  Explains policy decisions
• The effect lag refers to the time it takes for monetary policy to influence the economy
• One of the critical functions of a central bank is issuing currency
• Central banks manage the money supply by controlling the amount of money in circulation.


  True
• What do central banks influence when they set interest rates?

  Borrowing costs
• Match the role of a central bank component with its responsibility:

  Governor and Senior Executives ↔️ Lead the organization

  Monetary Policy Committee (MPC) ↔️ Sets interest rates

  Regional Branches ↔️ Conduct local operations

  Independent Status ↔️ Ensures autonomy from government
• What are the Governor and Senior Executives responsible for in a central bank?

  Setting overall direction
• What type of data do regional branches collect for central banks?

  Economic data
• Independent status allows a central bank to make decisions without direct government interference.


  True
• What are monetary policy tools used for by central banks?

  To influence the economy
• Lowering reserve requirements increases the money available for commercial banks to lend.


  True
• Central banks can expand or contract the money supply to achieve economic objectives
• What are the objectives of central banks when using monetary policy tools?

  Control inflation, stimulate growth
• Lowering reserve requirements increases the money supply.

  True
• Steps involved in open market operations

  1️⃣ Central bank decides to influence money supply

  2️⃣ Central bank buys or sells government securities

  3️⃣ Money supply increases or decreases

  4️⃣ Economy adjusts to new money supply
• What is the purpose of reserve requirements for commercial banks?

  Hold cash as reserves
• Monetary policy tools are used in the Inflation Targeting Framework to adjust interest rates and manage the money supply
• What role does central bank independence play in the effectiveness of monetary policy?

  Improves credibility
• Monetary policy effectiveness can be delayed by time lags.


  True