(a) Explain four functions of the stock exchange. (b) Explain four ways by which the Central Bank regulates the activities of commercial banks.

Answer Details

(a) Four functions of the stock exchange

1. Market for securities: it provides a ready and organised market where existing shares, stocks and bonds can be bought and sold.
2. Raising of capital: it helps companies and governments to raise long-term capital from the public through the sale of new securities.
3. Pricing of securities: it determines and publishes the fair market prices of securities through the forces of demand and supply.
4. Encourages saving and investment: it provides a safe outlet where surplus funds can be invested and later converted back into cash (liquidity), thereby mobilising savings.

(Others acceptable: barometer of the economy, protection of investors.)

(b) Four ways the Central Bank regulates commercial banks

1. Open market operations: buying or selling government securities to increase or reduce the amount of money in circulation.
2. Bank (rediscount) rate: raising or lowering the interest rate at which it lends to commercial banks, which influences their own lending rates.
3. Cash reserve ratio: fixing the proportion of deposits that commercial banks must keep with the Central Bank, so as to control how much they can lend.
4. Special directives and moral suasion: issuing instructions and giving advice to commercial banks on the amount and direction of their lending.

(Also acceptable: liquidity ratio, special deposits.)