Governments try to maintain the confidence of investors, business people, and consumers in their economies. Lost confidence causes companies to put off investing in new products and technologies, and consumers to delay the purchase of major items. Interest rates and consequently exchange rates play a large role in this confidence. How significant a role does Central Banks have in economic growth?

Answer:

Central bank of a country is an independent authority which helps in deciding the monetary policy, public bank regulations, stabilizing the currency of a country etc. thus a Central bank helps in reducing the rate of unemployment and prevent inflation. The development of an economy will be affected by the Central bank by regulating liquidity.

Generally they have 3 Monetary Policies and they are:

• Reserve Requirement :-

Each and every bank which is under the control of Central Bank keep a certain amount of cash as reserve. This enables the Central Bank to regulate the amount each bank can lend at each financial conditions.

• Open market operations :-

Here buying and selling of securities taken place between the Central bank and its regulated banks. Here also the amount of reserve will not be changed. But Cash in Bank will be changed.

• Apply Interest rate targets :-

This deals with 2 monetary policies such as contractionary and expansionary. During inflationary period, Central Bank will raise the interest rate of banks. This slows down the economic growth and reduce inflation. This policy is known as contractionery monetary policy.

During recession period, Central Bank will decrease the interest rate of banks. This boost up the economic growth and reduce recession. This policy is known as expansionary monetary policy.

The exchange rates has been controlled by Central Bank for avoiding inflation. Central Bank will trade huge volume of foreign currencies in order to make impact on demand and supply.