Managing Money and Interest Rates

Monetary policy is how a country's central bank (like the U.S. Federal Reserve) manages the money supply and interest rates to guide economic activity.

Tools of Monetary Policy

• Open Market Operations: Buying or selling government securities to add or remove money from the economy.
• Discount Rate: Changing the interest rate charged to banks for short-term loans.
• Reserve Requirements: Setting the minimum reserves banks must hold.

Goals

Central banks aim for:

• Low and stable inflation
• High employment
• Stable financial markets

Expansionary vs. Contractionary Policy

• Expansionary: Lower interest rates to encourage borrowing and spending.
• Contractionary: Raise interest rates to slow borrowing and control inflation.

Real-World Impact

Central banks played a key role in stabilizing economies during the global financial crisis by lowering interest rates and buying bonds.