How does the central bank control interest rates?

The central bank controls interest rates through a variety of tools, including open market operations, the discount rate, and reserve requirements. Open market operations involve the central bank buying or selling government securities in the open market to affect the supply of money and credit, which in turn affects interest rates. The discount rate is the interest rate that banks can borrow from the central bank, and changes in this rate can influence other interest rates in the economy. Finally, the central bank can also require commercial banks to hold a certain percentage of their deposits as reserves, which affects the amount of money they can lend and can impact interest rates. By using these tools, the central bank can exert significant control over interest rates and the overall state of the economy.