Monetary policy
Monetary policy
- Monetary policy = the central bank changing interest rates (and the money supply).
- The interest rate is the cost of borrowing and the reward for saving.
Practice
Monetary policy is run by the central bank, mainly by changing:
The central bank sets interest rates (and the money supply); fiscal policy uses spending and tax.
How it works
- Lower interest rates → borrowing cheaper → more spending and investment → more growth/jobs (but maybe inflation).
- Higher interest rates → borrowing dearer → less spending → less inflation (but maybe unemployment).
Practice
Lower interest rates tend to:
Cheaper borrowing raises spending and investment, boosting growth (but risking inflation).
Practice
Higher interest rates can help lower inflation but may raise unemployment.
Dearer borrowing cuts demand, easing inflation but possibly costing jobs.
You've got it
Key idea
- monetary policy = the central bank setting the interest rate
- lower rates → more spending/investment (growth, maybe inflation)
- higher rates → less spending (lower inflation, maybe unemployment)