Explain the 'currency authority' function of a central bank.
Solution
The central bank of a country has the exclusive authority to issue the currency (notes + coins). The currency issued by the central bank is known as 'legal tender money' i.e. the value of such currency is backed by the central bank. However, the currency issued by the central bank is its monetary liability. In other words, the central bank is obliged to back the currency issued by it by assets of equal value such as gold coins and foreign exchange. In addition to issuing currency to the general public, the central bank also issues currency to the central government of the country. That is, the central government if required, can sell its securities to the central bank and in return gets the required cash currency.
