AP MacroeconomicsMoney & Monetary Policy
Monetary Policy
Monetary policy is the central bank's use of the money supply and interest rates to influence the economy.
The central bank (the Federal Reserve in the U.S.) uses open market operations, the discount rate, and reserve requirements to change the money supply. Expansionary (easy) policy lowers interest rates to boost borrowing and aggregate demand; contractionary (tight) policy raises rates to fight inflation. Unlike fiscal policy, it is controlled by the central bank.
Formula / Example
Buy bonds → ↑ money supply → ↓ nominal interest rate → ↑ investment and AD.
Interactive graph
Money Market →
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Study module
Monetary Policy →
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