Question

In broad terms, explain how a central bank tries to maintain economic and financial stability and encourage economic growth.

Answer 1

The central banks uses a number of monetary tools to regulate the money supply in the economy and maintain price stability. The central bank also helps to promote economic growth.

The central bank uses tools like the monetary policy ,fiscal policy and the reserve requirement.

By using the reserve requirement, the central bank lowers the amount of money the banks need to keep with the central bank as reserves thus increasing the money supply in the economy.

Monetary policy influences the amount of money supply and the fiscal policy refers to the taxation charged by the Government.