What is Monetary policy
Monetary policy is the policy embraced by a government authority, typically the central bank, in pursuit of certain economic objectives.
The policy consists of a set of measures and decisions related to issuance of the local fiat money and the control over its amount in circulation. If a central bank pumps more money into circulation, this contributes to inflation. Conversely, if it increases the interest rates imposed on commercial banks, leading to a decrease in circulating money, inflation is slowed down or maintained at a constant rate.
The monetary policy can be contractionary or expansionary. In an expansionary money policy, the central authority decreases interest rates and raises money supply in attempt to improve the economy. However, this can lead to inflation. To reduce inflation, contractionary policy is used, bringing down the interest rates.