Monetary policy is the guideline issued by the central bank, currency board or other regulatory committee that determines the size and rate of growth of the money supply. This in turn affects the interest rates and inflation. Consumer spending is affected by the monetary policies because if the regulatory agencies decrease the reserve requirement or reduce the interest rates, this creates incentives for banks to loan and business to borrow. This promote spending on the part of the consumer as well since they can borrow money at a lower interest rate and new businesses will emerge that would offer more variety of products or services that consumers may spend for.
