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Monetary Policy



In the United States, the Federal Reserve establishes and implements monetary policy. In contrast to fiscal policy, which consists of spending and taxation decisions made by the government, monetary policy is purely concerned with the money supply and interest rates. The three goals the Federal Reserve tries to achieve are maximum sustainable employment, stable prices, and moderate long-term interest rates. An expansionary monetary policy of low interest rates can be used to spur economic activity; a contractionary monetary policy of high interest rates can be used to slow economic activity and inflation. Monetary policy is not flawless, and policymakers must be aware of issues such as policy lags, inaccurate targeting, and liquidity traps.

At A Glance