what is the monetary policy means course hero

Monetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied. By managing the money supply, a central bank aims to influence macroeconomic factors including inflation, the rate of consumption, economic growth, and overall liquidity.

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What is the main purpose of monetary policy?

Key Takeaways. Monetary policy is how a central bank or other agency governs the supply of money and interest rates in an economy in order to influence output, employment, and prices. Monetary policy can be broadly classified as either expansionary or contractionary.

What is contractionary monetary policy and how does it work?

Contractionary monetary policy, by increasing interest rates and slowing the growth of the money supply, aims to bring down inflation. This can slow economic growth and increase unemployment, but is often required to tame inflation.

What are the three monetary policy tools of central banks?

Central banks usually have three monetary policy tools: Open market operations: buying or selling bonds Changing the discount rate: changing the rate that the central bank charges banks to borrow money Changing the reserve requirement: changing how much money a bank must keep in reserves

Who is in charge of monetary policy?

The Federal Reserve Bank is in charge of monetary policy in the United States. The Federal Reserve has what is commonly referred to as a "dual mandate": to achieve maximum employment (with around 5 percent unemployment) and stable prices (with 2 to 3 percent inflation).

What is the purpose of monetary policy?

Monetary policy refers to the actions undertaken by a nation's central bank to control money supply and achieve sustainable economic growth. Monetary policy can be broadly classified as either expansionary or contractionary. Tools include open market operations, direct lending to banks, bank reserve requirements, ...

What is the purpose of the monetary authority when a country is facing a high unemployment rate during a slow

If a country is facing a high unemployment rate during a slowdown or a recession, the monetary authority can opt for an expansionary policy aimed at increasing economic growth and expanding economic activity.

What does the monetary authority look for in a macroeconomic analysis?

For instance, the monetary authority may look at macroeconomic numbers such as gross domestic product (GDP) and inflation, industry/sector-specific growth rates and associated figures, as well as geopolitical developments in international markets— including oil embargos or trade tariffs.

What is the purpose of increased money supply in the market?

Increased money supply in the market aims to boost investment and consumer spending.

What is the second option used by monetary authorities?

The second option used by monetary authorities is to change the interest rates and/or the required collateral that the central bank demands for emergency direct loans to banks in its role as lender-of-last-resort. In the U.S., this rate is known as the discount rate.

What is the Federal Reserve Bank?

The Federal Reserve Bank is in charge of monetary policy in the United States. The Federal Reserve (Fed) has what is commonly referred to as a "dual mandate": to achieve maximum employment while keeping inflation in check. Simply put, it is the Fed's responsibility to balance economic growth and inflation.

How do central banks use monetary policy?

Central banks use a number of tools to shape and implement monetary policy. First is the buying and selling of short-term bonds on the open market using newly created bank reserves. This is known as open market operations. Open market operations traditionally target short-term interest rates such as the federal funds rate.

What is the key term for monetary policy?

Key Terms. Key term. Definition. monetary policy. the use of the money supply to influence macroeconomic aggregates, such as output, inflation, and unemployment. dual mandate. the two objectives of most central banks, to 1) control inflation and 2) maintain full employment. contractionary monetary policy.

How does monetary policy help the economy?

Monetary policy can be used to achieve macroeconomic goals. When there is macroeconomic instability , such as high unemployment or high inflation , monetary policy can be used to stabilize the economy. The goals and appropriate monetary policy can be summarized as shown in the table below:

What are the three monetary policy tools that central banks use?

Central banks usually have three monetary policy tools: Open market operations: buying or selling bonds Changing the discount rate: changing the rate that the central bank charges banks to borrow money Changing the reserve requirement: changing how much money a bank must keep in reserves

Why do central banks use monetary policy?

This means that central banks use monetary policy to influence key variables like X and Y. We can summarize the impact monetary policy has on these variables as done in the table below:

What is expansionary monetary policy?

expansionary monetary policy. monetary policy designed to increase aggregate demand, increase output, and decrease unemployment; open market operations. the buying and selling of securities, such as bonds, by a central bank to change the money supply. Federal Reserve.

What happens when the central bank wants interest rates to be lower?

If the central bank wants interest rates to be lower, it buys bonds. Buying bonds injects money into the money market, increasing the money supply. When the central bank wants interest rates to be higher, it sells off bonds, pulling money out of the money market and decreasing the money supply.

What is discount rate?

discount rate. the name given to the interest rate that the Federal Reserve sets on loans that the Fed makes to banks; changing the discount rate is a tool of monetary policy, but it is not the primary tool that central banks use. reserve ratio.