Conventional Monetary Policy

The central bank is the lender of last resort to commercial bank and uses short-term interest rates to influence economic activity. The central bank backstops commercial banks having a run by lending to prevent a panic. When the economy is in a recession the central bank lowers rates to encourage consumption and investment. When the economy is overheating, it raises interest rates to temper economic activity1.


References

1.
Wang, S. 80/20 is the new Half-Ass. at https://www.swyx.io/8020.