Central banks aren’t quite the same as other banks. Their main job is to manage the stability of the financial system. This means they’ve got to keep price levels from increasing or decreasing too quickly. Central banks are also usually concerned with the overall state of the economy, and want to keep unemployment down and growth up. Central banks primarily do two things: manage private banks and control the money supply.
Monetary policy is how a country controls its money supply. Central banks are typically in charge of monetary policy. If things aren’t going well—unemployment is high, growth is low—then more money flowing around the economy makes it easier for people to get loans to make big investments, which helps the economy get going again. This is called expansionary, or loose monetary policy.
Inflation is when prices go up. Usually, when we talk about inflation we’re talking about general inflation—when the prices for just about everything go up at the same time. The prices of things can also go down; that’s called deflation.
Quantitative easing is when a central bank buys tons of financial assets to try to kickstart the economy. Central banks buy and sell government debt—a process called open market operations—to influence how much money there is in the economy. They did a lot of this in 2008, to try and decrease interest rates, and get more investment going. And it worked—sort of.
