Define monetary policy., Monetary policy involves adjusting the money supply so as to influence aggregate demand (AD) in the economy., What is meant by money supply?, The money supply is the amount of money available in an economy at any given moment in time. It consists of coins, bank notes, bank deposits and central bank reserves., What is meant by the interest rate?, Interest rate is the price of money. It is the price paid to lenders for borrowed money., Who is responsible for setting the monetary policy?, The central bank (i.e. The Bank of England/The US Federal Reserve) is responsible for setting the monetary policy., What is meant by expansionary monetary policy?, Expansionary monetary policy includes reducing interest rates by increasing the money supply, increasing quantitative easing or depreciating the exchange rate., The use of expansionary monetary policy is to achieve what macroeconomic objectives?, Expansionary monetary policy is used to promote economic growth and to reduce unemployment in the economy., What is meant by contractionary monetary policy?, Contractionary monetary policy includes increasing interest rates by reducing the money supply, decreasing quantitative easing or appreciating the exchange rate., The use of contractionary monetary policy is to achieve what macroeconomic objectives?, Contractionary monetary policy is used to slow down economic growth (to prevent the economy from overheating) and to reduce/tackle inflation. .

Monetary Policy Defined

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