The central bank buys the domestic current from the market when it has found out that there is more money circulation chasing to few goods. At this point inflation occurs. When the foreign reserve of the country is low, the central bank buys more foreign currencies. When it does this, the exchange rate is affected positively as the rate increases. If there is more foreign currency in the bank, it sells out hence withdrawing more domestic currency in circulation. This also lows the exchange rate.
Central bank acted on its role of being the lender of the last resort. Later, it played its roles like the other three central banks that is the European central bank, Federal Reserves and the bank of England in the tackling global financial crisis. Being the lender of the last resort the bank guarded against systemic risk in the banking sector. Central bank lowered the federal fund rate and used the discount window where banks were allowed to lend to institutions at discount rate.
Traditionally, in an attempt to assist the Subprime mortgage the Fed increased the supply for credit by lowering the rate to as low as 0.25% but didn't work. It also tried to increase liquidity by allowing overnight borrowing by banks but failed. When it had lowered the rates to zero, the Central bank introduced the qualitative easing whereby the bank made money and used it to purchase the assets. In an attempt to stabilize the financial system the four banking representing four countries spent lot money (Beulig, 2008). US through Fed spent an amount equivalent to 2.0% of the to country's GPD, Bank of England spent 1.6% of GDP of United Kingdom. The European Bank representing European countries spent 0.9% while china through bank of China spent 3.1% of the countries GDP (Beulig, 2008).
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The four countries responded similarly in an extraordinary fashion. For example they all extended loans worth billions of dollars in to the commercial and investment banks. They also had their interest rates reduced. The working of these countries towards the reduction of the crisis therefore worked well as they came up with coordinated strategies that worked. The United State however used different criteria as the old traditional tools of intervening did not work out (Smith, 2008).
The central bank of the US need to look for better means of responding to such crisis. In the meeting of 20 leading economies agreed to coordinate an action in an attempt to stabilize the global financial system. The central bank did well as they exploited all possible tools to intervene during the crisis. Their use of both the traditional tools and the extraordinary interventions to get out of the crisis.
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