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central bank

The central bank in each currency area (e.g. the US, the eurozone) acts essentially as the “bank for the banks” – i.e. JP Morgan will deposit funds with the US Federal Reserve. Essentially, because of this relationship, the central bank can set the basic “target interest rate” (see above). That sets the base interest rate for other interest rates to be based on and when interest rates are low, the banks can then offer loans to people and companies at low interest rates – and that’s one major way a central bank affects the economy.

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