(a) Explain how the Central Bank controls money supply through the use of: (i) open market operation (ii) bank rate.
(b) Outline four functions performed by the Central Bank of your country.
Explanation
a)(i) Open market: This involves the sales of securities e.g Treasury bills through the commercial banks. If the Central Bank wants to increase money supply, it will purchase securities from the public through the commercial banks. This way. the reserves of the commercial banks will increase. Thereby increasing their ability to grant more credit and vice versa.
(ii) Bank rate: This is the rate at which the Central Bank lends to the commercial banks and discounts bills of exchange so as to influence the money supply. To increase money supply. the Central Bank will reduce the bank rate. This will in turn lower the lending rates of commercial banks. causing the public to demand for more loans and vice versa. It controls research on the economy. It is the lender of last resort.
(b) (i) It acts as agent. banker and adviser to the government.
(ii) It controls the money supply / maintains price stability / determines monetary policy.
(iii) lt issues currency.
(iv) It is a banker to the other financial institutions
(v) lt operates a clearing house system
(vi) lt manages the public national debt.
(vii) It controls foreign currency.
(vii) It controls research on the economy.
(ix) It is the lender of last resort.