Answer to Question #49292 in Macroeconomics for Raquel Aracena
Monetary policy is controlling of the quantity of money in circulation for the expressed purpose of stabilizing the business cycle and reducing the problems of unemployment and inflation. In days gone by, monetary policy was undertaken by printing more or less paper currency. In modern economies, monetary policy is undertaken by controlling the money creation process performed through fractional-reserve banking. The Federal Reserve System (or the Fed) is U.S. monetary authority responsible for monetary policy. In theory, it can control the fractional-banking money creation process and the money supply through open market operations, the discount rate, and reserve requirements. In practice, the Fed primarily uses open market operations, the buying and selling of U.S. Treasury securities, for this control.
An important side effect of money supply control is control of interest rates. As the quantity of money changes, banks are willing to make loans at higher or lower interest rates.
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