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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  4. How is bond yield affected by monetary policy?

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  5. How are interest rates related to open market operations?

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  7. How do open market operations (OMOs) affect bond prices?

    Open market operations (OMOs) directly influence the money supply, which in turn impacts interest rates. Interest rates are ... Read Full Answer >>
  8. How is money supply used in monetary policy?

    Regulating the money supply is the sole tool of the Federal Reserve's monetary policy. The Federal Reserve can affect the ... Read Full Answer >>
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    Open market operations are a mechanism by which monetary policy is transmitted. Monetary policy aims to find the best balance ... Read Full Answer >>
  11. How is the Macaulay duration related to fixed income markets?

    Monetary policy influences the Fisher effect because it determines the nominal interest rate. The Fisher effect is an economic ... Read Full Answer >>
  12. How can the yield curve help me make investment decisions?

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  13. How do open market operations affect the overall economy?

    Open market operations affect the overall economy in that the Federal Reserve uses open market operations to control the ... Read Full Answer >>
  14. How does the law of supply and demand affect monetary policy in the United States?

    The law of supply and demand affects monetary policy in the United States through the adjustment of interest rates. Interest ... Read Full Answer >>
  15. 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 >>
  16. How do fiscal and monetary policies affect aggregate demand?

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  18. What are some examples of expansionary monetary policy?

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  19. What are the implications of a low Federal Funds Rate?

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  20. 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 >>
  21. What can policymakers do to decrease cyclical unemployment?

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  22. What are some examples of successful implementation of monetary policy?

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  23. How does the Federal Reserve's set discount rate affect my personal finances?

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  24. What is the role of deficit spending in fiscal policy?

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  25. What's the difference between monetary policy and fiscal policy?

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