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    The Effects of Monetary Policy

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    Dileep Parameswaran
    Monetary policy is used by central banks to regulate money supply and control inflation through tools like interest rates and money supply. The central bank uses these tools to help stabilize prices, minimize economic fluctuations, and maintain steady growth to reduce unemployment.

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    The Effects of Monetary Policy

    Uploaded by

    Dileep Parameswaran
    110 views1 page
    Monetary policy is used by central banks to regulate money supply and control inflation through tools like interest rates and money supply. The central bank uses these tools to help stabilize prices, minimize economic fluctuations, and maintain steady growth to reduce unemployment.

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    Monetary policy is used by central banks to regulate money supply and control inflation through tools like interest rates and money supply. The central bank uses these tools to help stabilize prices, minimize economic fluctuations, and maintain steady growth to reduce unemployment.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    110 views1 page

    The Effects of Monetary Policy

    Uploaded by

    Dileep Parameswaran
    Monetary policy is used by central banks to regulate money supply and control inflation through tools like interest rates and money supply. The central bank uses these tools to help stabilize prices, minimize economic fluctuations, and maintain steady growth to reduce unemployment.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    The Effects of Monetary Policy

    Monetary policy is the regulation of a country's money supply by the central bank of a country or
    region. In the United States, the central bank is the Federal Reserve Board. Monetary policy tools
    are used to help control the economy. The primary tools used by a central bank are changes to the
    prime interest rate, changes to the amount of money in circulation and changes in the reserve
    requirements for banks.

    1. Control Inflation
    o One of the primary impacts of monetary policy is on inflation. The goal of monetary
    policy is to control inflation, or the value of currency, through changes in monetary policy tools.
    When inflation rises, the central bank typically raises interest rates. High inflation makes the costs of
    goods higher. Central banks want to keep inflation low to keep the prices of goods stable relative to
    the value of the currency.

    Interest Rates
    o Monetary policy directly impacts interest rates. The central bank raises or lowers the
    prime rate, or interest rate the central bank loans money to other banks, as a tool to impact the
    economy. These actions have a trickle down effect on the interest rates charged on loans, credit
    cards and any other financial vehicle that is tied to the prime rate.
    Business Cycles
    o Business is cyclic in nature and goes through periods of expansion and contraction.
    Monetary policy attempts to minimize the speed and severity of these expansions and contractions
    to maintain steady growth or decrease a negative contraction. The goal is to keep an economy on a
    slow, but steady growth pattern to prevent recessions during periods of contraction.
    Spending
    o Monetary policy impacts the amount of money spent in an economy. When a central
    bank decreases interest rates, more money is typically spent in an economy. This increase in
    spending can equate to better overall health for an economy. Likewise, when interest rates are
    increased, spending declines, which could curtail inflation.
    Employment
    o Employment levels relate to the health of an economy. When inflation is low and an
    economy is stable or in an expansionary phase, employment levels are higher than when inflation is
    high and an economy is in a contraction phase. Changes in monetary policy that maintain economic
    stability and minimize inflation, tend to keep unemployment low

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