Monetary Policy

Monetary policy describes the ways in which the central banks change the money supply in order to accomplish certain economic objectives. In the U.S. this is done by the Federal Reserve.

Frequently Asked Questions
  • What is monetary policy?

    Monetary policy is how central banks influence the economy by raising or lowering the money supply. This is in contrast to fiscal policy, which is how the government uses its taxes and spending to affect the economy.

  • What are the tools of monetary policy?

    Monetary policy has a few main tools—reserve requirements, discount rates, open market operations (OMO), and quantitative easing (QE).

  • How does monetary policy affect markets?

    Monetary policy affects markets in many ways, however, two main ones include boosting or dampening the economy as a whole, and raising or lowering bond yields. First, as expansionary monetary policy can boost the economy as a whole, investments more sensitive to the business cycle will usually benefit and vice versa with contractionary policy. Secondly, monetary policy’s effect on interest rates causes yields to rise and fall, which changes the relative value of existing interest-bearing investments.

  • What is the difference between expansionary monetary policy and contractionary monetary policy?

    Expansionary monetary policy is when a central bank increases the money supply which fights recessions and increases economic growth. Contractionary economic policy pulls money out of the economy in order to fight inflation.

Key Terms

Explore Monetary Policy

Building Wealth
Should We Become a Cashless Society?
What Are the Top US Imports?
The Taylor Rule: An Economic Model for Monetary Policy
International Monetary Fund (IMF)
What Is the International Monetary Fund (IMF)?
M2 Definition and Meaning in the Money Supply
Demonetization: Meaning, Example, and How It Works
Import Substitution Industrialization (ISI) Defined, With Example
What Is a Fixed Exchange Rate? Definition and Examples
Narrow Money Definition vs. Broad Money, Qualifying Accounts
What Is a Liquidity Adjustment Facility (LAF) in Monetary Policy?
What Is a Trilemma and How Is It Used in Economics? With Example
Group of Seven (G7) Defined: Member Countries & How It Works
Marriner S. Eccles Federal Reserve Board Building
Currency Reserve
Monetarism: Printing Money To Curb Inflation
Aerial view of midtown Manhattan at night
Cost-Push Inflation vs. Demand-Pull Inflation: What's the Difference?
Inflation and Economic Recovery
Workers at the Reno Aces baseball stadium in downtown Reno, Nevada
Okun’s Law: Economic Growth and Unemployment
A Look at Fiscal and Monetary Policy
Liquidity Trap: Definition, Causes, and Examples
Does Raising the Minimum Wage Increase Inflation?
Why These European Countries Don't Use the Euro
A pile of Canadian money
Who Decides to Print Money in Canada?
Federal Reserve Building in Washington D.C.
Fiscal Policy vs. Monetary Policy: Pros and Cons
How Do Fiscal and Monetary Policies Affect Aggregate Demand?
federal reserve building
How Central Banks Control the Supply of Money
Full Frame Shot of Paper Currencies on Table
Keynesian Economics vs. Monetarism: What's the Difference?
Close up of Various Currency Notes and Coins
Foreign Exchange Reserves: What They Are, Why Countries Hold Them
Why India's Central Bank Chief May Resign
Monetary Base: Definition, What It Includes, Example
Implementation Lag
Foreign Exchange Intervention Definition, Strategies, Goals
Mumbai Interbank Bid Rate (MIBID)
Mumbai Interbank Bid Rate (MIBID) Definition
Street in City of London with Royal Exchange, Bank of England and new modern skyscrapers, England, UK
Bank of England (BoE): Role in Monetary Policy
Federal Reserve bank
Open Market Operations vs. Quantitative Easing: What’s the Difference?
Bank vault
Common Equity Tier 1 (CET1) Definition and Calculation
How Central Banks Monetize Government Debt
A group of doll figures standing around a money puzzle piece indicating a Central Bank's monetary policy.
Examples of Expansionary Monetary Policies
Asian Currency Unit (ACU)
10 Countries With the Highest Savings Rates
Pushing On A String
United States Federal Reserve Building, Washington DC, USA
Flow of Funds (FOF) Accounts: Definition, Uses, Data Reports??
Response Lag: What it is, How it Works, FAQ
What Is QE3 (Quantitative Easing)?
Indian Rupees
Who Regulates the Printing of Money in India?
What Central Banks Do
Federal Reserve Building
How Unconventional Monetary Policy Works
Macroeconomic Stabilization Fund (FEM)
Macroeconomic Stabilization Fund (FEM)
Stock Analysis
How the Great Inflation of the 1970s Happened
Building with columns
What Is Basel I? Definition, History, Benefits, and Criticism
Budget Cutting
Understanding Austerity, Types of Austerity Measures & Examples
Close up of the Capitol Building, Capitol Hill, Washington, D.C., United States of America, North America
Stimulus Package: Definition, Benefits, Types, and Examples
Optimum Currency Area (OCA) Theory: Examples in Economics
Why Is the Chinese Yuan Pegged?
Currency: What It Is, How It Works, and How It Relates to Money
Moral Suasion (Jawboning): Definition, How It Is Used, Example
Stimulus Check
What Is a Stimulus Check? Definition, How It Works, and Criticism
Tapering: How, Why, and When the Fed Does It and Impact on Financial Markets
Estate Agent Gives Pen and Documents Agreement With Customer To
Bank for International Settlements: Overview, History
Plaque -- Gold Room within the Mount Washington Hotel
How the Bretton Woods System Changed the World
Financial line graphs overlaid with cityscape at night
How Interest Rates Are Related to Open Market Operations