Introduction to Monetary Policy
                     INTRODUCTION 
TO MONETARY 
POLICY
WHAT IS MONETARY POLICY?
Monetary policy is a set of tools that a nation's 
central bank has available to promote 
sustainable economic growth by controlling the 
overall supply of money that is available to the 
nation's banks, its consumers, and its 
businesses.
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GOAL OF MONETARY POLICY
The goal is to keep the economy humming along 
at a rate that is neither too hot nor too cold. The 
central bank may force up interest rates on 
borrowing in order to discourage spending or 
force down interest rates to inspire more 
borrowing and spending.
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UNDERSTANDING MONETARY POLICY
Monetary policy is the control of the quantity of 
money available in an economy and the 
channels by which new money is supplied.
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WHAT GOES INTO POLICY DECISIONS
Monetary policy is formulated based on inputs from a 
variety of sources. The monetary authority may look at 
macroeconomic numbers such as gross domestic product 
(GDP) and inflation, industry and sector-specific growth 
rates, and associated figures.
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TYPES OF 
MONETARY 
POLICIES
EXPANSIONARY MONETARY POLICY
If a country is facing high unemployment due to a 
slowdown or a recession, the monetary authority can opt 
for an expansionary policy aimed at increasing economic 
growth and expanding economic activity.
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CONTRACTIONARY MONETARY POLICY
A contractionary monetary policy increases interest rates 
in order to slow the growth of the money supply and 
bring down inflation.
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TOOLS OF 
MONETARY 
POLICY
OPEN MARKET OPERATIONS
The Federal Reserve’s three instruments of monetary 
policy are open market operations, the discount rate and 
reserve requirements.
• Open market operations involve the buying and selling 
of government securities. 
• The term “open market” means that the Fed doesn’t 
decide on its own which securities dealers it will do 
business with on a particular day. 
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THE DISCOUNT RATE
• The discount rate is the interest rate charged by 
Federal Reserve Banks to depository institutions on 
short-term loans.
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RESERVE REQUIREMENTS
• Reserve requirements are the portions of deposits that 
banks must maintain either in their vaults or on 
deposit at a Federal Reserve Bank.
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