What is the function of a central bank in stabilizing the economy?

A central bank plays a crucial role in stabilizing the economy through various monetary policy tools and functions. One of its primary responsibilities is managing a nation's money supply and interest rates. By controlling the money supply, the central bank aims to ensure that inflation remains within a target range, which is essential for economic stability. When inflation is too high, the central bank may increase interest rates to reduce borrowing and spending, thereby cooling off an overheated economy. Conversely, if the economy is slowing down, it may lower interest rates to encourage borrowing, investment, and spending, stimulating economic growth. Another important function of the central bank is to act as a lender of last resort. During times of financial crisis, it can provide liquidity to financial institutions facing short-term difficulties, which helps to maintain public confidence in the banking system and prevents bank runs. Additionally, central banks often oversee and regulate the banking system to ensure its soundness and resilience. They monitor financial markets and institutions to address systemic risks that could threaten economic stability. Lastly, central banks often engage in open market operations, buying and selling government securities to influence liquidity in the banking system. By adjusting these operations, they can effectively guide economic conditions toward stability. For detailed information about a specific central bank's functions, it is always helpful to refer to the central bank's official website.