Definition
Monetary policy uses interest rate adjustments and balance sheet operations to manage inflation, employment, and economic growth. Conventional tools include the fed funds rate target. Unconventional tools include quantitative easing (QE), forward guidance, and yield curve control. Expansionary policy lowers rates and increases money supply; contractionary policy does the opposite.
lightbulb Example
During COVID-19, the Fed cut rates to 0% and launched $4 trillion in QE (expansionary policy). In 2022-2023, it raised rates to 5.5% and began quantitative tightening (contractionary policy) to fight resulting inflation.
verified_user Key Points
- Central bank manages money supply and rates
- Expansionary: lower rates, more money supply
- Contractionary: higher rates, less money supply
- Unconventional: QE, forward guidance, YCC