FOREX THEORY
Types of Monetary Policy
Monetary policy can be
referred to in a couple different ways. Contractionary or restrictive monetary
policy takes place if it reduces the size of the money supply. It can also
occur with the raising of interest rates.
The idea here is to slow
economic growth with the high interest rates. Borrowing money becomes harder
and more expensive, which reduces spending and investment by both consumers and
businesses.
Expansionary monetary
policy, on the other hand, expands or increases the money supply, or decreases
the interest rate.
The cost of borrowing money
goes down in hopes that spending and investment will go up.
Accommodative monetary
policy aims to create economic growth by lowering the interest rate, whereas
tight monetary policy is set to reduce inflation or restrain economic growth by
raising interest rates.
Finally, neutral monetary
policy intends to neither create growth nor fight inflation.
The important thing to
remember about inflation is that central banks usually have an inflation target
in mind, say 2%.
They might not come out and
say it specifically, but their monetary policies all operate and focus on
reaching this comfort zone.
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