What is meant by "Monetary Policy"?
Answers
Monetary policy is the process of drafting, announcing and executing the plan of actions taken by a country's currency board, central bank or other governing authority that determines the scope and the impact of the key drivers of the economic activity in that country.
Monetary policy can either be
i) expansionary - when a monetary authority uses its tools to stimulate the economy and maintains short-term interest rates at a lower rate than usual rate thus increasing the total supply of money in the economy or
ii) contractionary - where short- term interest rates are higher than the usual rates thus decreasing the rate of growth in the money supply.
As a part of expansionary monetary policy, the monetary authority often lowers the interest rates through various measures that make money saving relatively unfavorable and promotes spending. It leads to higher consumer spending on a variety of goods and services, and an increased money supply in the market.