3.5. Monetary Policy

Monetary Policy

The set of official policies relating to interest rates and the money supply, controlled by the central bank.

Money Supply

The amount of money in circulation in an economy at a given time.

Open Market Operations

The central bank buying and selling bonds to influence the money supply.

Bonds

A financial instrument whereby the owner is promised regular payments of money until the bond expires.

Quantitative Easing

The central bank buying bonds from commercial banks, to enable them to lend more money to households and firms.

Minimum Reserve Requirement

The minimum proportion of savings that commercial banks must keep in cash reserves.

Expansionary Monetary Policy

Reductions in the interest rate or increases in the money supply to increase AD.

Contractionary Monetary Policy

Increases in the interest rate or reductions in the money supply to reduce AD.