Guide to Monetary Policy

Foreign exchange reserves, also called Forex reserves, are stores of foreign currencies held by central banks. The central banks use these to purchase their own currency to carry out monetary policy.

M2 is one way to measure the money supply. It includes all cash and checking deposits, referred to as M1, as well as savings deposits, money market securities, and certificates of deposit (CD).

The IMF is a multinational organization meant to promote economic growth, ensure the stability of the world financial system, and lower poverty. It offers grants, loans, and other financial assistance to countries to accomplish these goals.

A liquidity trap is when cash savings rates are high and interest rates are low. This combination makes it difficult for monetary policy to affect the economy.

Economic stimulus refers to policies undertaken by a government or central bank to increase economic growth and counter recession. These can be either fiscal or monetary in nature.

A currency is anything that serves as a medium of exchange, a store of value, and a unit of account. Most countries have a standard currency to serve these functions in that country.

The monetary policy trilemma is the inability to simultaneously have a fixed currency exchange rate, allow capital to flow in and out of a country freely, and maintain an autonomous monetary policy. A country can only have two of the above and the decision as to which two is a critical part of monetary policy.