Monetary Policy and Macroeconomic stabilization

A monetary policy alters the money supply. In return, money supply affects interest rates. There are two different types of policy.

The first policy is easy money policy. If the macro-economy ever experience a decline income, the FED follow the easy money policy which increase money supply. This result in lowering interest rates.

Second policy is tight money policy. This said that if the economy ever experience high inflation the FED will introduce this policy decreasing money supply. It will result in pushing interest rates upward and cause real GDP down.

Lastly, in a monetary policy there are monetarism that believe money supply is the most important  factor in macroeconomic performance.

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