Monetary Theory

What is a 'Monetary Theory'

A monetary theory is a set of ideas about how monetary policy should be conducted within an economy. Monetary theory suggests that different monetary policies can benefit nations depending on their unique set of resources and limitations. It is based on core ideas about how factors like the size of the money supply, price levels and benchmark interest rates affect the economy. Economists and central banking authorities are typically those most involved with creating and executing monetary policy.

BREAKING DOWN 'Monetary Theory'

In many developing economies, monetary theory is controlled by the central government, which may also be conducting most of the monetary policy decisions. In the U.S., the Federal Reserve Board sets monetary policy without government intervention. The Federal Reserve operates on a monetary theory that focuses on maintaining stable prices (low inflation), promoting full employment and achieving steady growth in gross domestic product (GDP). The idea is that markets function best when the economy follows a smooth course, with stable prices and adequate access to capital for corporations and individuals.

RELATED TERMS
  1. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  2. Policy Mix

    A government's combined use of fiscal policy and monetary policy ...
  3. Non-standard Monetary Policy

    Non-standard monetary policy, or unconventional monetary policy, ...
  4. Accommodative Monetary Policy

    When a central bank (such as the Federal Reserve) attempts to ...
  5. Monetary Conditions Index - MCI

    A measure of monetary conditions in the Canadian economy, giving ...
  6. Push On A String

    When monetary policy cannot entice consumers into spending more ...
Related Articles
  1. Economics

    Fiscal Vs. Monetary Policy Pros & Cons

    When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two primary courses of action: monetary policy and fiscal policy.
  2. Term

    What's Tight Monetary Policy?

    A tight monetary policy constricts spending and curbs inflation.
  3. Economics

    Monetary Policy

    Monetary policy is a central bank’s actions that influence the country’s money supply and the overall economy.
  4. Investing

    Quantitative Easing

    Learn more about this monetary policy employed by central banks.
  5. Professionals

    Monetary Policy

    FINRA Series 6 Exam Study Guide - Monetary Policy. In this section, Monetary policy tools, money supply and interest rates. The role of the federal reserve board in monetary policy.
  6. Economics

    How Unconventional Monetary Policy Works

    Unconventional monetary policy, such as quantitative easing, can be used to jump-start economic growth and spur demand.
  7. Economics

    A Look At Fiscal And Monetary Policy

    There's a debate over which policy is better for the economy. Find out which side of the fence you're on.
  8. Economics

    Top 4 Central Banks Dominating the World Economy

    Central banks play an integral role in market economies by maintaining the stability and credibility of national currencies used in those economies.
  9. Professionals

    Monetary Policy and Price Level Stability

    CFA Level 1 - Monetary Policy and Price Level Stability
  10. Economics

    A Look At Fiscal And Monetary Policy

    Fiscal and monetary policies provide our government and the Federal Reserve with two powerful tools to regulate the economy.
RELATED FAQS
  1. Under what circumstances will a government change its monetary policy?

    Learn about the kind of variables, including political and theoretical factors, that can bring about change in a government's ... Read Answer >>
  2. How is free enterprise affected by monetary policy?

    Find out how state-run monetary policy changes a free enterprise system by adjusting market rates of interest and manipulating ... Read Answer >>
  3. What precise measures are implemented in most monetary policies?

    Read about some of the precise measures implemented in most monetary policies, and learn why monetary policy is considered ... Read Answer >>
  4. What's the difference between monetary policy and fiscal policy?

    Learn how monetary policy refers to bank actions to control interest rates and money supply, while fiscal policy refers to ... Read Answer >>
  5. How do open market operations affect the U.S. money supply?

    Formulating a country's monetary policy is extremely important when it comes to promoting sustainable economic growth. More ... Read Answer >>
  6. How does monetary policy influence inflation?

    Take a deeper look at how contemporary central banks attempt to target and control the level of inflation through monetary ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center