Monetary Policy

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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%.

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RELATED FAQS
  1. How does expansionary economic policy impact the stock market?

    Expansionary economic policy leads to increases in the stock market because it generates increased economic activity. Policymakers ... Read Full Answer >>
  2. How do fiscal and monetary policies affect aggregate demand?

    Aggregate demand is a macroeconomic concept representing the total demand for goods and services in an economy. This value ... Read Full Answer >>
  3. Which is more effective: expansionary fiscal policy or expansionary monetary policy?

    In terms of improving the real economy, expansionary fiscal policy is more effective. In terms of the financial economy, ... Read Full Answer >>
  4. What are some examples of expansionary monetary policy?

    Examples of expansionary monetary policy are decreases in the discount rate, purchases of government securities and reductions ... Read Full Answer >>
  5. What are the implications of a low Federal Funds Rate?

    The federal funds rate is the interest rate at which banks borrow reserves from one another. A low federal funds rate implies ... Read Full Answer >>
  6. How does monetary policy impact the cost of debt?

    Monetary policy influences short-term interest rates, and the cost of debt is defined as the effective interest rate paid ... Read Full Answer >>
  7. 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 >>
  8. 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 >>
  9. 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 >>
  10. 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 >>
  11. 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 >>
  12. 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 >>
  13. 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 >>
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