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Lambda expressions serve as concise replacements for anonymous classes, primarily used for functional interface implementations. Unlike anonymous classes, they do not maintain state and utilize type inference for parameters, allowing the compiler to deduce types from the interface. Lambda expressions can capture local, instance, and static variables without introducing new scoping levels. However, captured variables must be effectively final. The compiler determines lambda types based on the surrounding context, influencing which overloaded methods are invoked based on the target type associated with the lambda expression.

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