Monetary Policy

AAA

DEFINITION of 'Monetary Policy'

The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).

INVESTOPEDIA EXPLAINS 'Monetary Policy'

In the United States, the Federal Reserve is in charge of monetary policy. Monetary policy is one of the ways that the U.S. government attempts to control the economy. If the money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is slowed too much, then economic growth may also slow. In general, the U.S. sets inflation targets that are meant to maintain a steady inflation of 2% to 3%.

RELATED TERMS
  1. Fiscal Policy

    Government spending policies that influence macroeconomic conditions. ...
  2. Fiscal Cliff

    A combination of expiring tax cuts and across-the-board government ...
  3. Economic Stimulus

    Attempts by governments or government agencies to financially ...
  4. Money Supply

    The entire stock of currency and other liquid instruments in ...
  5. Hawk

    A policymaker or advisor who is predominantly concerned with ...
  6. Federal Reserve System - FRS

    The central bank of the United States. The Fed, as it is commonly ...
RELATED FAQS
  1. What can policymakers do to decrease cyclical unemployment?

    Downturns in the business cycle cause cyclical unemployment, so policymakers should focus on expanding output, which they ... Read Full Answer >>
  2. What are some examples of successful implementation of monetary policy?

    It is very difficult to evaluate monetary policy because of the dynamic and undefined nature of macroeconomics. By its very ... Read Full Answer >>
  3. How does the Federal Reserve's set discount rate affect my personal finances?

    The set discount rate of the Federal Reserve Bank affects personal finance by being the determining factor of all other interest ... Read Full Answer >>
  4. What is the difference between fiscal policy and monetary policy?

    Fiscal policy and monetary policy are both integral tools in supporting and changing the macroeconomics of the United States. ... Read Full Answer >>
  5. What is the role of deficit spending in fiscal policy?

    As a part of its fiscal policy, a government sometimes engages in deficit spending to stimulate aggregate demand in an economy. ... Read Full Answer >>
  6. What's the difference between monetary policy and fiscal policy?

    Monetary policy and fiscal policy refer to the two most widely recognized "tools" used to influence a nation's economic activity. ... Read Full Answer >>
  7. How do central banks inject money into the economy?

    Central banks use several different methods to increase (or decrease) the amount of money in the banking system. These actions ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    The Treasury And The Federal Reserve

    Find out how these two agencies create policies to stimulate the economy in tough economic times.
  2. Economics

    How Much Influence Does The Fed Have?

    Find out how current financial policies may affect your portfolio's future returns.
  3. Markets

    Consumer Spending As A Market Indicator

    What people buy and where they shop can provide valuable information about the economy.
  4. Personal Finance

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  5. Forex Education

    Get To Know The Major Central Banks

    The policies of these banks affect the currency market like nothing else. See what makes them tick.
  6. Forex Education

    3 Key Markets To Follow When Trading FX

    With the increased interconnectivity of the global markets these days, it pays to understand market relationships.
  7. Forex Education

    Currency Carry Trades 101

    This strategy can provide returns even if the currency pair doesn't move a cent.
  8. Economics

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  9. Personal Finance

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  10. Forex Education

    The New World Of Emerging Market Currencies

    Take advantage of foreign currency markets without stepping out of your house.

You May Also Like

Hot Definitions
  1. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  2. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  3. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  4. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  5. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
  6. Currency Carry Trade

    A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase ...
Trading Center