Monetary
policies refer to actions that are taken by governments (or the duly
appointed monetary regulatory committees in a country) to control the behavior of the
economy. Monetary policies can be divided into two:
contractionary and expansionary. When an expansionary monetary policy is
implemented, the amount of money in circulation (in a country) is increased
through lowering of interest rates. The ultimate effect of this is that business and consumer spending goes up (loans are easily available), unemployment rates drop and the economy grows. Contractionary measures
are introduced through raising interest rates thereby liquidity (availability of
money in the economy) is reduced. As a result, consumer spending reduces and so inflation is kept
within sustainable levels.
