Answer:
Monetary policy is the set of actions taken by a central bank to influence a country's macroeconomic situation (inflation, employment, production, exchange rate, etc.). It can be either expansionary or contractionary.
The purpose of expansionary monetary policy is to accelerate the economy if it is in a recession. If interest rates fall, companies become more willing to lend money for investment. A fall in interest rates may also stimulate private consumption; In an open economy, a lower interest rate will also normally cause the exchange rate to fall, which improves competitiveness and therefore results in higher exports and smaller imports.
Contractionary monetary policy works opposite to the expansionary one. It is primarily used in a boom, where there is a risk of overheating and too high inflation levels and therefore a need to put a damper on the economy. This can be done by raising the interest rate, whereby the opposite happens: Investment and private consumption are dampened, and if the exchange rate increases as a result of the interest rate change, it will in itself reduce net exports.
In the US, the Federal Reserve System (FED) is responsible for monetary policy. The official objectives of the Fed's monetary policy are manifold: maximum employment, stable prices and moderate long-term interest rates.
