FE: Central Bank
1. How would central bank maintain the stability of financial system? 1. Monetary Policy: Central banks formulate and implement monetary policy to manage the money supply, interest rates, and credit availability. They use tools like open market operations, reserve requirements, and discount rates to influence these factors. By maintaining price stability and controlling inflation, central banks help ensure the overall stability of the financial system. Example: If the central bank observes that inflation is rising above the target level, it may increase interest rates to reduce borrowing and spending, thereby slowing down the economy and curbing inflationary pressures. 2. Lender of Last Resort: Central banks act as a lender of last resort to provide liquidity support to commercial banks and financial institutions during times of financial distress or liquidity shortages. By providing emergency funding, central banks prevent widespread panic, bank runs, and potential systemic colla...