Monetary policy

 Monetary policy 

Monetary policy is a set of tools used by a nation's Central Bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements.


  • Monetary policy is a set of actions to control a nation's overall money supply and achieve economic growth.
  • Monetary policy strategies include revising interest rates and changing bank reserve requirements.
  • Monetary policy is commonly classified as either expansionary or contractionary.
  • The Federal Reserve commonly uses three strategies for monetary policy including reserve requirements, the discount rate, and open market operations.

Goals of Monetary Policy

Inflation

Contractionary monetary policy is used to temper inflation and reduce the level of money circulating in the economy. Expansionary monetary policy fosters inflationary pressure and increases the amount of money in circulation.

Unemployment

An expansionary monetary policy decreases unemployment as a higher money supply and attractive interest rates stimulate business activities and expansion of the job market.

Exchange Rates

The exchange rates between domestic and foreign currencies can be affected by monetary policy. With an increase in the money supply, the domestic currency becomes cheaper than its foreign exchange.

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