What Is Monetary Policy?

Monetary policy is how a country's central bank manages money supply and interest rates to achieve economic goals like stable prices and low unemployment.

Tools of Monetary Policy

• Open Market Operations: Buying or selling government bonds to influence the amount of money in the economy.
• Changing Interest Rates: Lower rates make borrowing cheaper, which encourages spending and investment.
• Reserve Requirements: The percentage of deposits banks must keep on hand.

Why Use Monetary Policy?

Central banks use monetary policy to keep inflation in check, stimulate economic growth, or cool down an overheating economy.

Real-World Impact

When interest rates fall, people borrow and spend more, boosting the economy. When rates rise, spending slows down, which can help control inflation.