Monetary policy refers to the decisions and tools used by a nation’s central bank—such as the Federal Reserve in the U.S.—to manage the supply of money and credit in the economy. Its key goals are to maintain stable prices (control inflation), promote full employment, and support overall economic growth.
The Fed uses several tools to conduct monetary policy, including adjusting the federal funds rate (the interest rate banks charge each other), buying or selling government securities (known as open market operations), and setting reserve requirements for banks. By raising or lowering interest rates, the Fed can either stimulate borrowing and investment or slow down an overheating economy.
Unlike fiscal policy, which is controlled by Congress and involves taxation and government spending, monetary policy is a financial lever aimed at managing the pace and stability of economic activity.
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