{"id":32093,"date":"2021-09-28T15:56:12","date_gmt":"2021-09-28T15:56:12","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=32093"},"modified":"2026-07-30T18:30:44","modified_gmt":"2026-07-30T18:30:44","slug":"central-banks-targets-2","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/central-banks-targets-2\/","title":{"rendered":"Central Banks Targets"},"content":{"rendered":"\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/opwhOwJygDA?si=goaGOBXcxC7-JMli\" 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<p class=\"wp-block-paragraph\">A central bank is a national institution granted the prerogative to control the printing and supply of money and credit. Central banks play important roles in the economy since they are the sole suppliers of currency to the government, bankers to commercial banks, lenders of last resort, supervisors of the payment systems, and implementers of the monetary policy.<\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Interest Rates Targeting<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">A central bank has a policy rate that is the most evident expression of its aims and opinion. The policy rate is expressed through interest rates. The rate that the central bank declares publicly is the rate at which it can loan money to commercial banks. This policy is achieved by using short-term collateralized rates.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The policy enables the central bank to manage the sum of money in the money markets. So, the higher the interest rates, the higher the penalty that commercial banks will have to pay the central bank if they run short of liquidity. This reduces the capacity of commercial banks to lend money to the public and, hence, causes a reduction in money supply.<\/p>\n\n\n\n<div style=\"margin: 18px 0;\"><a style=\"display: block; text-align: center; padding: 14px 18px; border: 2px solid #2F5BFF; border-radius: 18px; color: #ffffff ; font-weight: 600; font-size: 16px; text-decoration: none; background-color: #1a73e8 ;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\">Master central bank targets with AnalystPrep\u2019s Free Trial. <\/a><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Inflation Rate Targeting<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Occasionally, the central bank receives a degree of freedom to act independently without the government&#8217;s permission during an inflationary period. This freedom is crucial, for example, in regulating politicians\u2019 decisions to set an inflation target and authorize the central bank to set interest rates as ordered.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This inflationary target could be a benchmark. When this is the case, other policies are implemented to ensure that the inflation rate within the economy does not grow beyond the targeted inflation rate within a given period of time.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Another degree of independence is <strong>target independence<\/strong>. This is not only intended to control lending rates but also the rate of inflation they target.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Exchange Rate Targeting<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The exchange rate is directly connected to the stability of an economy. Therefore, the central bank keenly monitors the forex market and takes necessary&nbsp;measures whenever there is need. This aims to protect the foreign interest of the country within its jurisdiction.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In this regard, the central bank plays a crucial role in altering interest rates. An increase in interest rates stimulates traders to buy the respective country\u2019s currency. This results in a stronger currency compared to other countries.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<h3 class=\"wp-block-heading\"><strong>Question<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">A central bank increases its policy rate. How will this reduce the inflationary pressures?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A. By reducing the consumer demand.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">C. By reducing the foreign exchange value of the currency.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">B. By raising asset prices which will lead to an increase in household wealth.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Solution<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The correct answer is <strong>A<\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A successful increase in policy rates will decrease consumer demand due to rise in credit rates. Therefore, this decline in demand results in a reduction of pressure on consumer prices.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>B is incorrect.<\/strong> Increasing the interest rate will increase the domestic country&#8217;s currency. This will result in a stronger currency compared to other countries, decreasing imports.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><b>C<\/b> <strong>is incorrect<\/strong>. Increasing the policy rate will reduce asset prices because banks will be reluctant to loan to businesses and consumers. As such, there will be less investment and consumption.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">&nbsp;<\/p>\n<\/blockquote>\n\n\n\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\n\n\n<div style=\"text-align: center; margin: 30px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 26px; border-radius: 9999px; background: #1e5bd8; color: #ffffff; font-weight: bold; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Start Free Trial \u2192 <\/a> <p style=\"margin-top: 12px; font-size: 16px; line-height: 1.5;\">Strengthen your understanding of central bank targets, monetary policy goals, inflation objectives, and economic stability measures with CFA Level I study notes, practice questions, and mock exams.\n<\/p>\n <\/div>\n","protected":false},"excerpt":{"rendered":"<p>A central bank is a national institution granted the prerogative to control the printing and supply of money and credit. Central banks play important roles in the economy since they are the sole suppliers of currency to the government, bankers&#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-32093","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 v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Central Banks Targets - AnalystPrep | CFA\u00ae Exam Study Notes<\/title>\n<meta name=\"description\" content=\"A central bank is a national institution granted the prerogative to control the printing and supply of money and credit. 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