Central banks have different tools they use to help manage money and keep the economy running smoothly. Let’s look at the main tools they use:

1. Open Market Operations: This is the most common tool. It means that the central bank buys or sells government bonds, which are like loans to the government.

   • When they buy bonds, they put more money into the economy. This lowers interest rates, making it cheaper for people to borrow money and spend it.
   • When they sell bonds, they take money out of the economy. This raises interest rates, which can help slow down inflation.

2. Interest Rate Adjustments: Central banks decide on key interest rates, like the federal funds rate in the U.S.

   • When they lower this rate, borrowing money is cheaper, which can help the economy grow.
   • When they raise the rate, it can help cool off an economy that’s getting too hot.

3. Reserve Requirements: This is the portion of money that banks must keep on hand and not lend out.

   • Changing these requirements can affect how much money banks can lend.
   • If the reserve requirement is lower, banks can lend more money. If it’s higher, they lend less, which can help control inflation.

4. Discount Rate: This is the rate at which banks can borrow money from the central bank.

   • When the discount rate is lowered, it becomes cheaper for banks to borrow. This encourages them to lend more to people and businesses.

5. Forward Guidance: This is how central banks share their plans for future monetary policy.

   • If they say that interest rates will stay low for a long time, it can lead people and businesses to borrow and invest more.

These tools are important for keeping the economy stable, controlling inflation, and helping it grow. Central banks need to choose the right tools based on what’s happening in the economy.