3.5.1—Monetary policy

Monetary policy uses interest rates, money conditions and expectations to influence inflation, output, employment and exchange rates.

Central-bank transmission works through borrowing, saving, asset prices, expectations and exchange rates with time lags.

Name the target and trace the channel.

A rate rise can reduce borrowing and demand, lowering inflation after a lag.

Policy affects several objectives and may have distributional effects.

Monetary policy is the central bank's control or influence over the money supply and interest rates. Its goals include low and stable inflation (often through an inflation target), low unemployment, smoother business-cycle fluctuations, a stable environment for long-run growth and external balance. Because one decision can affect several goals, state the targeted objective and possible conflict—for example, tighter policy may reduce inflation but temporarily lower output and employment.