What is a Central Bank?

Central Bank Definition – A Central Bank is a financial institution, such as the U.S. Federal Reserve System, charged with regulating the size of a nation’s money supply, the availability and cost of credit, and the foreign exchange value of its currency. Central banks generally act as the fiscal agent of their respective government, issuing notes to be used as legal tender, supervising the safety and soundness of the commercial banking system, and implementing monetary policy. By increasing or decreasing the supply of money and credit, they affect interest rates, thereby influencing the economy. Modern central banks regulate the money supply by market intervention, the act of buying and selling government securities or foreign currency. They may also raise or lower the discount rate to regulate borrowing by commercial banks. By adjusting the reserve requirement, the minimum cash reserves that banks must hold against their deposit liabilities, central banks contract or expand the money supply. Their objective is to maintain conditions that support a high level of employment, production, and stable domestic prices with minimal inflation. Central banks also take part in cooperative international currency arrangements designed to help stabilize or regulate the foreign exchange rates of participating countries.

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