Explain the role of central bank in controlling the supply o

Explain the role of central bank in controlling the supply of money in an economy

Solution

The central bank is the main body which has to control the money supply. When the economy is weak, that is output and growth are at low levels , there is unemployment, the central bank will opt for policies increase the money supply, so that the buying power increases in the economy, people start spending and economy strengthen backs again. eq- purchashing of government securities. Similarly , just the opposite scenario, where the bank feels that the economy is showing inflationary tendencies, it will reduce the money supply which will increase the interest rate and thus acting as a not so beneficial situation to invest in the economy, and thus controlling further increase in the price level.