Q. What is the basic function of Central banks?
A central bank is a public authority which is responsible for monetary policy for a country or a group of countries. Two significant central banks are the European Central Bank (for countries which are members in the European Monetary Union) and Federal Reserve of the United States.
Central banks have a monopoly on issuing national currency and primary responsibility of a central bank is to preserve a stable national currency for a country (or a stable common currency for a currency union). Stability is a number of times specified in terms of inflation and/or growth rate in the money supply.
Other significant responsibilities include providing banking services to commercial banks and government and regulating financial markets and institutions. In this sense, a central bank is the "bankers' bank" - other banks can borrow from or lend money to the central bank. Consequently all banks in a country have an account in the central bank. When a commercial bank orders currency from central bank, corresponding amount is withdrawn from this account. This account is also used for transfers between commercial banks. Central banks also manage country's foreign exchange and gold reserves.