Final answer:
The Irish Central Bank handles the issuance of currency with caution due to the effects on aggregate demand and international trade. Exchange rate fluctuations can disrupt trade and set up the economy for recession if not managed properly. Direct intervention by buying foreign currencies to hold as reserves carries opportunity costs, so it's done judiciously.
Step-by-step explanation:
The Role of the Central Bank in Currency Issues
The Irish Central Bank, similar to other central banks, has a crucial function in managing the issuance of currency. It must consider the impact on aggregate demand and the balance of international trade, as changes in the exchange rate can significantly influence these aspects of the economy. Firstly, if the exchange rate fluctuates too frequently or drastically, it can lead to disruptions in international trade and potentially contribute to an unsustainable balance of trade. Secondly, such volatility may also cause problems within the nation's banking system, risking large inflows of international financial capital and predisposing the economy to a deep recession if investors suddenly withdraw their funds.
Another critical aspect of the central bank's role involves direct intervention in the exchange rate market. When the central bank perpetually creates and sells its currency in favor of obtaining foreign currencies like the U.S. dollars or euros, it consequently builds up reserves of these foreign currencies. This practice carries an opportunity cost, and as a result, central banks are typically reluctant to increase such reserves indefinitely.