Term of the Day - 25 March 2024

Today’s Term is “Monetary Policy”.

Monetary policy refers to the actions taken by a central bank or monetary authority to control and regulate the supply of money, credit availability, and interest rates in an economy to achieve specific economic objectives. It is one of the primary tools used by policymakers to influence aggregate demand, stabilize prices, and promote sustainable economic growth.

Key aspects of monetary policy include:

1. Interest Rates: Central banks adjust short-term interest rates, such as the Monetary Policy Rate, to influence borrowing and lending activities by businesses and consumers, thereby affecting investment, consumption, and aggregate demand.

2. Money Supply: Central banks use various tools, such as open market operations, reserve requirements, and discount rate adjustments, to control the money supply in the economy, influencing liquidity conditions and credit availability.

3. Inflation Targeting: Many central banks employ inflation targeting as a key objective of monetary policy, aiming to maintain price stability by keeping inflation within a target range.

4. Economic Stability: Monetary policy plays a crucial role in stabilizing the economy during periods of recession or inflationary pressures, aiming to achieve full employment and stable economic growth over the long term.

Overall, monetary policy serves as a powerful tool for central banks to manage economic conditions and promote macroeconomic stability, contributing to overall economic welfare and prosperity.