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The ultimate goal of the steps a central bank takes to reduce inflation. That is, when prices are rising rapidly, the central bank may reduce the amount of money in circulation and/or raise interest rates to bring down the rate at which prices are rising. Price stabilization does not bring prices down to their former levels, but it does reduce the rate at which they rise to a more sustainable level. While this is popular in theory, it is important to note that Federal Reserve chairman Paul Volcker caused a recession in the early 1980s when he raised interest rates to 18% to achieve price stabilization.
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Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.