Jethro's Braindump

How Central Banks Affect the Economic Cycle

Central banks have two main responsibilities in the economy:

  1. Controlling inflation
  2. 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:

  1. Alter money supply
  2. Alter interest rates
  3. 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.

Links to this note