How Do Central Banks Work?

Editor's note: Ask TheStreet is designed to answer questions about the market, terms, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment- or stock-related advice.

---

How do central banks inject billions into their economies, and does that money need to be paid back? -- C.P.

Central banks look out for the monetary policy of their countries. When a country's economy is in trouble, it is the central bank that can "save" the proverbial day, but how central banks manage that feat is the trillion-dollar question.

What Is a Central Bank?

Central banks are responsible for controlling the monetary policy of their countries. Essentially, this means that one of their key jobs is to manipulate the money supply in that country to meet its economic goals (such as market growth ).

Here in the U.S., the central bank is the Federal Reserve (commonly referred to as "the Fed"). Other important central banks around the world include the European Central Bank , the Bank of England and the People's Bank of China.

But you might be wondering why everyone's always on "Fed watch." It's because the money supply really is a big deal. Here's why.

Money Doesn't Grow on Trees

Most people will agree that money is a limited resource. While that Lamborghini would definitely make a nice addition to my driveway, I can't really afford the $311,000 price tag. The same is true for the economy -- as a whole, money is scarce.

But from an economic standpoint, the scarcity of money doesn't just affect what we're able (or not able) to buy. Factors such as inflation , employment rates and market growth are all affected by the money supply situation.