what is monetary policy 
monetary policy is a set of tools used by a nation s central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements in the united states the federal reserve bank implements monetary policy through a dual mandate to achieve maximum employment while keeping inflation in check 1xiaojie liu investopediaunderstanding monetary policymonetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied economic statistics such as gross domestic product gdp the rate of inflation and industry and sector specific growth rates influence monetary policy strategy a central bank may revise the interest rates it charges to loan money to the nation s banks as rates rise or fall financial institutions adjust rates for their customers such as businesses or home buyers additionally it may buy or sell government bonds target foreign exchange rates and revise the amount of cash that the banks are required to maintain as reserves types of monetary policymonetary policies are seen as either expansionary or contractionary depending on the level of growth or stagnation within the economy a contractionary policy increases interest rates and limits the outstanding money supply to slow growth and decrease inflation where the prices of goods and services in an economy rise and reduce the purchasing power of money 2during times of slowdown or a recession an expansionary policy grows economic activity by lowering interest rates saving becomes less attractive and consumer spending and borrowing increase 1goals of monetary policycontractionary monetary policy is used to temper inflation and reduce the level of money circulating in the economy expansionary monetary policy fosters inflationary pressure and increases the amount of money in circulation an expansionary monetary policy decreases unemployment as a higher money supply and attractive interest rates stimulate business activities and expansion of the job market the exchange rates between domestic and foreign currencies can be affected by monetary policy with an increase in the money supply the domestic currency becomes cheaper than its foreign exchange tools of monetary policyin open market operations omo the federal reserve bank buys bonds from investors or sells additional bonds to investors to change the number of outstanding government securities and money available to the economy as a whole 3the objective of omos is to adjust the level of reserve balances to manipulate the short term interest rates and that affect other interest rates 3the central bank may change the interest rates or the required collateral that it demands in the u s this rate is known as the discount rate 4 banks will loan more or less freely depending on this interest rate the federal reserve commonly uses three strategies for monetary policy including reserve requirements the discount rate and open market operations authorities can manipulate the reserve requirements the funds that banks must retain as a proportion of the deposits made by their customers to ensure that they can meet their liabilities lowering this reserve requirement releases more capital for the banks to offer loans or buy other assets increasing the requirement curtails bank lending and slows growth monetary policy vs fiscal policymonetary policy is enacted by a central bank to sustain a level economy and keep unemployment low protect the value of the currency and maintain economic growth by manipulating interest rates or reserve requirements or through open market operations a central bank affects borrowing spending and savings rates fiscal policy is an additional tool used by governments and not central banks while the federal reserve can influence the supply of money in the economy and impact market sentiment the u s treasury department can create new money and implement new tax policies 5 it sends money directly or indirectly into the economy to increase spending and spur growth 6both monetary and fiscal tools were coordinated efforts in a series of government and federal reserve programs launched in response to the covid 19 pandemic 7