'MONETARY POLICY'

The actions of a central bank, government or other regulatory committee that determine the
size and rate of growth of the money supply.
Monetary policy is maintained through actions such as increasing the interest rate, or changing
the amount of money banks need to keep in the vault (bank reserves).
Types of monetary policy
1. EXPANSIONARY MONETARY POLICY
Expansionary monetary policy is appropriate when the economy is in recession and
unemployment is a problem. The goal of expansionary monetary policy is to reduce
unemployment and increase amount of money in market
Therefore the tools would be an increase in the money supply government can.

 Lower the interest rate

 Buy government bonds (open market purchase)
 Lower the reserve ratio
2. CONTRACTIONARY MONETARY POLICY
Contractionary monetary policy is appropriate when economy is in expansion and inflation is a
problem. The goal of contractionary monetary policy is to reduce inflation and reduction of
money in market
Therefore the tool would be the decrease in the money supply government can

 Sell government bonds (an open market sell)

 Raise the interest rate
 Raise the reserve ratio