3.5 Monetary Policy

Monetary policy

carried out by the central bank and involves the control of money supply and interest rates to influence aggregate demand and fulfil macroeconomic objectives

Expansionary monetary policy

aims to increase the level of aggregate demand by increasing money supply and reducing interest rates

Contractionary monetary policy

aims to decrease the level of aggregate demand by decreasing money supply and increasing interest rates

Money supply

the amount of money circulating in the economy which includes notes coins loans credits and deposits

Interest rates

the cost of borrowing and reward for saving of money, expressed as a percentage

Inflation targeting

the practice of using monetary policy to achieve a predetermined level of inflation

Nominal interest

the actual interest rate that is agreed between the bank and the customer, which is the rate that borrowers pay their loans or savers receive from their deposits

Real interest

considers the impact of inflation on the cost of borrowers and the return for savers

Central bank

the monetary authority responsible for an economy’s monetary policy and financial system regulation