ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -On a macro basis, central banks influence interest rates and participate in open market operations to control the cost of borrowing and lending throughout an economy. Central banks also operate on a micro-scale, setting the commercial banks’ reserve ratio and acting as lender of last resort when necessary.

Detailed explanation-2: -Because inflation is unacceptable due to the increased price levels throughout the economy, the Fed can only lower the money supply, not raise it. All of these make central banking difficult. There is a lag between when policies are enacted and when the effects of those policies can be seen.

Detailed explanation-3: -Some of the main responsibilities central banks have are: Defining monetary policy – central banks set macroeconomic objectives such as to ensure price stability and economic growth. To do this, financial authorities have tools like setting official interest rates, which have an impact on the cost of money.

Detailed explanation-4: -Lender of Last Resort: This saves banks from possible failure and banking system from a possible breakdown.