Street Economics 101: Monetary Policy

the role of the central bank. their mandate is to control 1) inflation (keep prices of goods stable) 2) unemployment (stimulate job creation) and 3) control the exchange rate of the currency (maintain a certain range). they keep these variables fixed by controlling the amount of money in circulation in the country.

why are these important? well most central banks will claim that their mandate is really setting a target inflation (1). but truly speaking all three of the above are linked, so as a matter of fact the central bank governor keeps an eye on all three and ensures that they are kept at a certain target. inflation is important since no one wants high prices of goods - cheap is good. unemployment is obvious in that we all want everybody to be employed and be able to afford basic goods. and a stable exchange rate is critical for a country that is reliant on exporting goods, since this makes exports affordable to foreigners. there we have it the role of the central bank (using monetary policy) to control these three targets, the rest is just detail.