How do central banks influence the economy?

How do central banks influence the economy?

Central banks influence the economy primarily through monetary policy, which includes setting interest rates and controlling money supply.

What tools do they use to implement monetary policy?

They use tools like open market operations, discount rates, and reserve requirements to manage liquidity and stabilize the economy.

Can you explain how interest rates affect inflation?

Certainly! When central banks raise interest rates, borrowing becomes more expensive, which can reduce spending and investment, leading to lower inflation.

What happens if a central bank keeps rates too low for too long?

Keeping rates too low for too long can lead to excessive inflation, asset bubbles, and can undermine the currency's value.