Series 79: Monetary Policy, The Money Supply, And Interest Rates

Monetary Policy, the Money Supply, and Interest Rates

Monetary policy is a tool used by national governments to control the supply and availability of money and credit and thereby to affect overall economic activity in a country. Monetary policy is premised on the theory that changes in a country’s money supply—the total amount of money in the economy—will have direct and far-reaching effects on that country’s economy.

In highly simplified terms, monetary policy assumes that growth in the money supply increases the amount of available credit, which in turn causes interest rates to decline. Lower interest rates stimulate economic activity by reducing the cost of borrowing and encouraging business investment. Unemployment goes down, and personal income and consumer spending rises. However, all this extra money sloshing around