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.