Monetary Policy
Definition
Set of tools used by the central bank to control the overall money supply such as revising interest rates and changing bank reserve requirements.
Types
Contractionary
Expansionary
Increase interest rates
Limits outstanding money supply
Goal: reduce the purchasing power
Lower interest rates
Savings become less attractive because of the low interest rates
Goal: increase consumption and boost economy
Goals
Stabilize inflation rates
Lower unemployment
Stabilize exchange rates
Tools
Open market operations
Interest rates
Reserve requirement rate
Collateral
adjust the level of reserve balances to manipulate the short-term interest rates and that affect other interest rates.