Monetary Policy Definition. What is Monetary Policy? This term is used to describe the activities undertaken by a government agency, typically the central bank of a country, to moderate the supply of money, availability of money, and cost of money or rate of interest to help promote economic growth, price stability, high employment, and a stable currency for use in international trade transactions. The Federal Reserve System is the monetary agency and central bank in the United States. The Fed carefully reviews the status of the domestic economy and, based on that review and accepted economic theories, formulates policies designed to obtain desired economic objectives in the marketplace. Generally, Monetary Policy is regarded as either expansionary or contractionary. The former is achieved by rapidly expanding the money supply in the economy, and the latter relates to the opposite approach. The general method used is to regulate interest rates as a means to achieve these objectives. The counterpoint to Monetary Policy is Fiscal Policy, which is the process of stimulating or contracting the economy through the use of government spending, borrowing and taxation.
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