Using monetary policy, more specifically short-term interest rates, if the economy is facing a recessionary gap, we will decrease the interest rate and increase the aggregate demand.
What is Monetary policy?
The central bank's macroeconomic policy is known as monetary policy. It is a demand-side economic strategy used by a nation's government to achieve macroeconomic goals including inflation, consumption, growth, and liquidity. It involves managing the money supply and interest rate.
The decisions made by central banks to affect the cost and accessibility of money in an economy are known as monetary policy. Interest rate changes and adjustments to bank reserve requirements are examples of monetary policy strategies. The Federal Reserve frequently employs the discount rate, open market operations, and reserve requirements as its three primary monetary policy tools.
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