The Role of Central Banks

The Role of Central Banks

Courses Info

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

Central Bank – manages the currency of a country and controls the money supply

Examples of Central Banks

  • Bank of England (UK)
  • Federal Reserve (US)
  • European Central Bank (EU)

Key functions of a Central Bank

1. Implements the Monetary Policy

  • Central Banks are responsible for implementing the Monetary Policy to help keep the inflation rate and interest rate stable

2. Issue Money

  • Central Banks also print / issue money in the form of notes and coins. They have to ensure the right amount of money is printed as any excessive amount will cause inflation to increase

3. Lends money to the Government

  • Central Banks organise money to the government by intervening – when needed – to prevent any ‘liquidity shortages’ from occurring if the Government fails to sell enough bonds to investors

4. Lender to banks

  • Lender of the Last Resort – a central bank offers to sell loans to other banks which are undergoing difficult financial situations and are unable to secure necessary funds elsewhere

5. Maintain Economic Growth and prevent the unemployment rate from rising

  • Central Banks also have the responsibility of overlooking other macroeconomic objectives
  • In some situations, they may have to accept a higher inflation rate to discourage the economy from falling into a recession

Regulation in the Banking Industry

  • Prudential Regulation Authority (PRA) – ensure the stability of firms in the financial services sector
  • Financial Conduct Authority (FCA) – protects consumers, promote competition and maintain stability within the financial services sector

AQA Spec – Additional Content

Liquidity and Capital Ratios

Liquidity Ratios

These are used to distinguish the capabilities of a company in paying off its short term obligations

A higher ratio indicates a better ability for the company to pay off its short term liabilities

Capital Ratios

These refer to a bank’s financial strength and compare the equity capital with the risk-weighted assets of a bank

Cash has zero risk, whereas credit has a much higher risk


Quick Fire Quiz – Knowledge Check

1. Explain what a Central Bank is (2 marks)

2. Identify three examples of a Central Bank (3 marks)

3. Explain five functions of a Central Bank (10 marks)

4. Identify and explain two regulatory bodies within the Banking Industry (4 marks)


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