Monetary Policy

U.S.

monetary policy affects all kinds of economic and financial decisions people
make in this country?whether to get a loan to buy a new house or car or to
start up a company, whether to expand a business by investing in a new plant or
equipment, and whether to put savings in a bank, in bonds, or in the stock
market, for example. Furthermore, because the U.S. is the largest economy in the
world, its monetary policy also has significant economic and financial effects
on other countries. The object of monetary policy is to influence the
performance of the economy as reflected in such factors as inflation, economic
output, and employment. It works by affecting demand across the economy?that
is, people’s and firms’ willingness to spend on goods and services. While most
people are familiar with the fiscal policy tools that affect demand?such as
taxes and government spending?many are less familiar with monetary policy and
its tools. Monetary policy is conducted by the Federal Reserve System, the
nation’s central bank, and it influences demand mainly by raising and lowering
short-term interest rates.