{"id":32067,"date":"2021-09-28T14:43:41","date_gmt":"2021-09-28T14:43:41","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=32067"},"modified":"2026-01-21T16:05:51","modified_gmt":"2026-01-21T16:05:51","slug":"roles-and-objectives-of-central-banks","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/roles-and-objectives-of-central-banks\/","title":{"rendered":"Roles and Objectives of Central Banks"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Monetary and Fiscal Policy (2025 Level I CFA\u00ae Exam \u2013 Economics \u2013 Module 5)\",\n  \"description\": \"This video lesson covers the fundamentals of monetary and fiscal policy, including their functions, tools, and objectives. It explains money creation, demand and supply theories, and the roles of central banks. The lesson also explores inflation effects, monetary transmission, policy limitations, and the interaction between monetary and fiscal policies.\",\n  \"uploadDate\": \"2022-03-25T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/opwhOwJygDA\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=opwhOwJygDA\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/opwhOwJygDA\",\n  \"duration\": \"PT31M45S\"\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Purpose of credit control by central banks\",\n    \"text\": \"Credit control refers to actions undertaken by central banks to:\\n\\nA. control inflation.\\n\\nB. control imports and exports.\\n\\nC. control the money creation of the government.\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"A. control inflation.\\n\\nCredit control involves central bank actions that regulate the availability and cost of credit in the economy. By influencing the credit creation process of commercial banks, central banks aim to manage inflationary and deflationary pressures.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"B. control imports and exports.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"C. control the money creation of the government.\"\n      }\n    ]\n  }\n}\n<\/script>\n\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/opwhOwJygDA?si=X0982QDABLPgnDmW\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n\n<h2><strong>Objectives of Central Banks<\/strong><\/h2>\n<p>The main objective of a central bank is to <strong>ensure financial stability<\/strong>. Depending on the country, central banks might have other objectives such as controlling inflation, unemployment, interest rates, or exchange rates. However, all these objectives are in line with the main objective of ensuring financial stability.<\/p>\n<h2><strong>Roles of Central Banks<\/strong><\/h2>\n<p>To ensure financial stability, central banks execute the roles discussed below.<\/p>\n<h4><strong>1. Currency Regulation<\/strong><\/h4>\n<p>Central banks have the monopoly of issuing notes, and these notes issued by central banks act as legal tender of money. Each central bank has an issue department that issues coins and notes to commercial banks. Even though the government manufactures these notes and coins, they are circulated by the central bank. Therefore, the money put in circulation must be monitored to ensure that just the right amount is in circulation.<\/p>\n<p><!--more--><\/p>\n<h4><strong>2. Control of Commercial Banks<\/strong><\/h4>\n<p>All commercial banks are obligated to prepare and submit a report of their undertaking to the central bank after a given period of time. These statistics are important in decision-making in the finance sector. The central bank can influence the activities of commercial banks through its monetary policies.<\/p>\n<h4><strong>3. Banker, Fiscal Agent, and Adviser to the Government<\/strong><\/h4>\n<p>The central bank receives deposits on behalf of the government from sources such as income tax and foreign aid. It also makes payments on behalf of the government. Moreover, the central bank advises the government on economic and monetary matters such as inflation and deficit financing. The government also gets short-term loans from the central bank.<\/p>\n<h4><strong>4. Controller of Credit<\/strong><\/h4>\n<p>The control of credit is realized through the use of the monetary policy. The central bank controls the credit creation power of commercial banks to curb inflationary and deflationary pressures on the economy.<\/p>\n<h4><strong>5. Custodian of Cash Reserves of Commercial Banks<\/strong><\/h4>\n<p>The law requires that commercial banks keep a particular percentage of reserves in the central bank. It is on this basis that the central bank transfers money from one bank to another to facilitate the clearance of cheques. A central bank is, therefore, a bank to commercial banks.<\/p>\n<h4><strong>6. Lender of Last Resort<\/strong><\/h4>\n<p>Commercial banks normally borrow from discount houses. However, during times of financial problems, they can seek funds from the central bank by borrowing at the market rate instead of the bank rates given by discount houses.<\/p>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\n<p>Credit control refers to actions undertaken by central banks to:<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li>control inflation.<\/li>\n<li>control imports and exports.<\/li>\n<li>control the money creation of the government.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>The central bank controls the credit creation process by commercial banks so as to control inflationary and deflationary pressures on the economy.<\/p>\n<\/blockquote>\n<div class=\"notes_inv\"><hr>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/learning-sessions-curriculum-economics\/\"><em>Economics &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Objectives of Central Banks The main objective of a central bank is to ensure financial stability. Depending on the country, central banks might have other objectives such as controlling inflation, unemployment, interest rates, or exchange rates. However, all these objectives&#8230;<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-32067","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Roles &amp; Objectives of Central Banks | CFA\u00ae Study Notes<\/title>\n<meta name=\"description\" content=\"Learn the main objectives of central banks, such as financial stability, and how these goals vary by country. 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