What Is Monetary Policy?
Central banks use policy to influence the amount of money in the economy, directly affecting us all.
Monetary policy might sound like the province of economists alone, but its effects are all around us. Have you ever winced at rising prices or taken out a loan because of favorable interest rates?
Monetary policy refers to the tools that central banks—centralized financial institutions of countries or regional organizations such as the European Union—use to influence the money supply, or the amount of money in an economy. Central banks use these tools because they want to keep inflation—rising prices in an economy—increasing but in check, and maximize employment.
But monetary policy isn’t just a domestic concern. In a globalized world, national economies are connected, and decisions made in one country can have consequences for others.
In this module, we will
- learn about the importance of the U.S. dollar and how its global prominence benefits the United States;
- understand how supply and demand influence the value of a currency;
- examine the role and responsibilities of central banks, particularly the U.S. Federal Reserve System;
- evaluate the international response to the 2008 financial crisis; and
- study how monetary policy can be a foreign policy tool, as exemplified by the Suez Canal crisis.