Monetary Policy
Definition
Monetary policy refers to actions taken by a central bank (such as adjusting interest rates or controlling money supply) to manage and stabilize an economy's money supply, credit availability, and interest rates.
Analogy
Think of monetary policy as a thermostat for an economy. Just like how you adjust your thermostat to control temperature levels at home, central banks use monetary policy tools to regulate economic conditions.
Related terms
Fiscal Policy: Government policies concerning taxation and spending that influence economic activity.
Inflation Targeting: A monetary policy strategy aimed at maintaining low and stable inflation rates over time.
Open Market Operations: The buying or selling of government securities by central banks to control money supply and interest rates.
"Monetary Policy" appears in:
Subjects (3)
Study guides (6)
AP Macroeconomics - 2.2 Limitations of GDP
AP Macroeconomics - 2.4 Price Indices and Inflation
AP Macroeconomics - 4.5 The Money Market
AP Macroeconomics - 5.1 Fiscal and Monetary Policy Actions in the Short-Run
AP Macroeconomics - 6.3 Foreign Exchange Market
AP Macroeconomics - 6.6 Real Interest Rates and International Capital Flows
Additional resources (4)
Practice Questions (4)
- What's the primary tool that the Federal Reserve uses to implement monetary policy?
- What does the Federal Reserve do when it wants to increase the money supply as part of its monetary policy?
- How does the Federal Reserve influence interest rates as part of its monetary policy?
- What is the connection between monetary policy and exchange rates?
Resources
© 2024 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.