How Central Banks Affect the Economic Cycle
Central banks have two main responsibilities in the economy:
- Controlling inflation
- Controlling employment rates
These two responsibilities balance each other: when employment rates rise, the economy grows stronger, resulting in inflation, and vice versa.
Central banks act counter-cyclicly to moderate inflation. To do this, central banks can employ several strategies:
- Alter money supply
- Alter interest rates
- Buy or sell securities: when the private sector purchases securities from the bank, money is taken out of circulation, and this reduces the demand for goods.