What is the primary purpose of a central bank in a modern economy?

• A. To manage the money supply and interest rates, stabilize prices, and promote full employment and economic growth.
• B. To set tax rates for the government.
• C. To enforce labor unions.
• D. To regulate international trade agreements.

Answer: (B)

The main role of a central bank is to conduct monetary policy by managing the money supply and influencing interest rates to keep prices stable and support sustainable employment and economic growth. By adjusting the money supply and setting policy rates, the central bank helps control inflation, influence borrowing costs, and create conditions for predictable, steady economic activity. Tools like open market operations (buying or selling government securities), reserve requirements for banks, and the discount rate are how they steer liquidity and borrowing costs in the economy.

Setting tax rates is a fiscal policy function handled by the government and parliament, not the central bank. Enforcing labor unions is a labor policy matter, and regulating international trade agreements is a trade policy area. These are distinct from the central bank’s focus on money, credit, and financial stability.