If the objective of monetary policy is to achieve stable inflation, the central bank should accommodate changes in money demand but not changes in inflation expectations. In the face of rising market interest rates, should the central bank increase the money supply or keep the money supply unchanged? How can information from the foreign exchange market help with making the decision?
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The Central Bank is the prime bank of any economy since without it there would exist no institution which would monitor the day-to-day functionalities of all existing banks within the economy. Since in any economy there would be heavy monetary transactions and here without any regulatory body it would be impossible to keep a track of all these monetary activities. So, any central bank is more than a central bank since it also controls the monetary stability of any economy. Let's take an example of the federal bank which is the central bank of the United States of America. The central bank is also responsible for stabilizing and controlling the interest rates of lending and saving in any economy.
Its main function as monetary stability is monetary expansion which includes raising the interest rates and conducting open market operations and in case of monetary contraction its main functions include decreasing interest rates and issuing new bonds in the market.
With all these functions the central bank is the bankers' bank which means it lends money to other banks and in case of emergencies it also protects other banks from liquidation. The central bank also lends money to the central government or any state government in case of emergencies.
Thus, the central bank is the sole monetary institution of any economy.
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