ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -What Is Monetary Policy? Monetary policy is a set of tools used by a nation’s central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements.

Detailed explanation-2: -The reserve requirement is another tool that the Fed has at its disposal to control liquidity in the financial system. By reducing the reserve requirement, the Fed is executing an expansionary monetary policy, and conversely, when it raises the requirement, it’s exercising a contractionary monetary policy.

Detailed explanation-3: -Monetary policy influences interest rates in the economy – like interest rates for housing loans, business loans and interest rates on savings accounts. Changes in interest rates influence people’s decisions to invest or consume, which ultimately affects economic growth, employment and inflation.

Detailed explanation-4: -As the Federal Reserve conducts monetary policy, it influences employment and inflation primarily through using its policy tools to influence the availability and cost of credit in the economy.