In modern monetary systems, central banks play a crucial role in the dynamics that an economy experiences. Today, almost every country has its central banks that take care of currency and foreign reserve related issues of the country. Central banks also have an important role in decision and policymaking criteria for the economy. The economy may experience instability in the absence of central banks. Central banks also control the flow and volume of the currency that should be present in the economy that causes fluctuations to the living standards and inflation rate in a country.
Why Central Banks are Important?
Besides currency, central banks also deal with foreign reserves. The importance of foreign reserves for an economy is obvious. It enables an economy to compete in international markets. Foreign reserves are held by the central bank of the country. The usage of power by central banks is an important agenda when monetary policies are under discussion.
The crucial responsibility of a central government is defined by the choice of the monetary standard. In a fixed exchange rate, the central bank buys or sells foreign exchange on demand in order to sustain the rate. In the case of fast sales, the base of growth of money decreases and eventually the quantity of money and credit falls down. This causes an increase in interest rates.
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