Monetary Policy
Monetary policy refers to the adjustments of the interest rates and the availability of money in the economy set by the central bank.
Central banks use monetary policies to reach macroeconomic objectives. These policies can include:
- Control the money supply
- Adjustment of interest rates
Monetary policy is a demand-side policy, as it affects the aggregate demand of an economy by influencing the interest rates and money supply.
Role of Central Bank
The central bank is a financial institution that is responsible for:
- Regulating the country's financial system and commercial banks.
- Supervising and monitoring commercial banks to ensure rules are being followed.
- Carrying out monetary policies.
- Acting as a banker for the government.
- Holding deposits and making loans for the government when needed.
- Issuing currency.
- Controlling the money supply and interest rates.
The central bank is independent from the government to avoid political influence in the decision making behind monetary policies.
Common MistakeStudents often confuse the roles of the central bank and commercial banks. Remember, the central bank controls the overall money supply and interest rates, while commercial banks deal with individual customers or firms.
