Ai. Explain how the Central Bank controls money supply through the use of:
Open market operations
Aii. Explain how the Central Bank controls money supply through the use of:
bank rate
B. Outline four functions performed by the Central Bank of your country
Ai. Open market Operation is the purchase or sale of government securities in the open market to expand or restrict the volume of
money in circulation. When there is too much money in circulation, the central bank will sell securities but in order to expand the
volume, it will buy securities.
Aii. Bank rate is the minimum rate of interest charged by the central bank for discounting bill of exchange. By lowering or raising the
rate, the central bank can control the activities of the commercial banks. When the rate increases, loan to the
public(customers)reduces, while a fall in the rate will encourage more loans.
B.-Bankers to the government: Central bank is an agent and banker to the government. It controls public account, receives
revenue on behalf of the government amd makes payment from this account. Cental bank also obtains loans on behalf of the
government.
- Issuance and control currency: The Central bank has the right to order the printing of the currency and issuance of it. It
controls the circulation of currency, exchange of bad notes for new ones, and sees to the destruction of the bad notes.
- Bankers bank: The central bank acts as banker to the banks buy ensuring that the banks open accounts with it in order to
facilitate clearng of cheques. This helps the commercial banks to have similar facilitites to offer to their customer.
- Lender of last resort: The central bank has a duty to assist the banking system when the banks are in financial difficulties so
that they can withstand the strian of excessive demands.
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