Monetary policy or financial policy is a branch of economic policy that uses the amount of money as a variable to control and maintain economic stability. It includes the decisions of the monetary authorities referring to the money market, which modify the amount of money or the interest rate. When applied to increase the amount of money, it is called an expansive monetary policy-quantitative expansion-and when applied to reduce it, a restrictive monetary policy.
• The reduction of the money supply tends to raise interest rates and tighten credit conditions. If the demand for money does not change, a reduction in the money supply raises interest rates. On the other hand, it decreases the volume of credit and the loans available to the public. They raise the interest rates for those who apply for mortgage loans to purchase homes and for companies that want to expand their factories, buy new machinery or increase inventories. The rise in interest rates also reduces the value of the public's financial assets, reducing the price of bonds, shares, land and housing.
One method of having control of inflation is by a contractionary monetary policy. A contractionary policy reduces the money supply within an economy by decreasing bond prices and increasing interest rates. This helps reduce spending because when there is less money to go around, those who have money want to keep it and save it, instead of spending it.
