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What Is Monetary Policy Theory?

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Tina Tejwaney answered
Monetary policy is a tool used by the central bank or the government in order to achieve specific targets. This is done by increasing or decreasing the money supply. An easy monetary policy is when you increase the money supply and a tight monetary policy is when you decrease the money supply in the economy. The specific targets could be to curb inflation or deflation etc. Easy monetary policy, which is also known as expansionary monetary policy is used to lower the unemployment during a recession. This is done by lowering interest rates. Using a tight or contractionary monetary policy the government can curb inflation by increasing interest rates. Basically monetary policy deals with three variables, that is, the total money supply, the rate of interest in the economy and the price at which money can be borrowed. Monetary policy is used mainly for controlling open market operations which includes buying and selling of government securities. Any monetary authority or rather the central bank is responsible to alter the money supply in the economy as and when needed in the country.

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