Read the text and name the part Monetary Policyplaysin national government's policy.

What is 'Monetary Policy'?

Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep in the vault (bank reserves).

TheFederal Reserveis in charge of the United States' monetary policy.

Breaking down 'Monetary Policy'

Broadly, there are two types of monetary policy, expansionary and contractionary. Expansionary monetary policy increases the money supplyin order to lower unemployment, boost private-sector borrowing and consumer spending, and stimulate economic growth. Often referred to as "easy monetary policy," this description applies to many central banks since the 2008 financial crisis, as interest rates have been low and in many cases near zero.

Contractionary monetary policy slows the rate of growth in the money supply or outright decreases the money supply in order to control inflation; while sometimes necessary, contractionary monetary policy can slow economic growth, increase unemployment and depress borrowing and spending by consumers and businesses. An example would be the Federal Reserve's intervention in the early 1980s: in order to curb inflation of nearly 15%, the Fed raised its benchmark interest rate to 20%. This hike resulted in a recession, but did keep spiraling inflation in check.

Central banks use a number of tools to shape monetary policy.Open market operations directly affect the money supply through buying short-term government bonds (to expand money supply) or selling them (to contract it). Benchmark interest rates …affect the demand for money by raising or lowering the cost to borrow—in essence, money's price. When borrowing is cheap, firms will take on more debt to invest in hiring and expansion; consumers will make larger, long-term purchases with cheap credit; and savers will have more incentive to invest their money in stocks or other assets, rather than earn very little—and perhaps lose money inreal terms—through savings accounts. Policy makers also manage risk in the banking system by mandating thereservesthat banks must keep on hand. Higher reserve requirementsput a damper on lending and rein in inflation.

In recent years, unconventional monetary policy has become more common. This category includesquantitative easing, the purchase of varying financial assets from commercial banks. In the US, the Fed loaded its balance sheet with trillions of dollars inTreasury notesandmortgage-backed securitiesbetween 2008 and 2013. TheBank of England, the European Central Bankand theBank of Japanhave pursued similar policies. The effect of quantitative easing is to raise the price of securities, therefore lowering their yields, as well as to increase total money supply.Credit easingis a related unconventional monetary policy tool, involving the purchase of private-sector assets to boost liquidity. Finally, signaling is the use of public communication to ease markets' worries about policy changes: for example, a promise not to raise interest rates for a given number of quarters.

Central banks are often, at least in theory, independent from other policy makers. This is the case with the Federal Reserve and Congress, reflecting the separation of monetary policy from fiscal policy. The latter refers to taxes and government borrowing and spending.

Objectives of Monetary Policy

The primary objective of central banksis to manageinflation. The second is to reduceunemployment, but only after they have controlled inflation.

The U.S.Federal Reserve,like many other central banks, has specific targets for these objectives. It seeks anunemployment ratebelow 6.5 percent. The Fed said thenatural rate of unemploymentis betweenis between 4.7 percent and 5.8 percent. It wants thecore inflation rateto be between 2.0 percent and 2.5 percent. It seekshealthy economic growth. That's a 2-3 percent annual increase in the nation'sGross Domestic Product.

Types of Monetary Policy

Central banks usecontractionarymonetary policytoreduce inflation. They havemany toolsto do this. The most common are raising interest rates and selling securities throughopen marketoperations.

Theyuseexpansionary monetary policyto lower unemployment and avoidrecession. They lower interest rates, buy securities from member banks, and use other tools to increase the liquidity.