Monetary policy refers to all of the strategies used by a central bank to control the amount of money in the economy and the value of that money. Monetary policy is usually aimed at creating an economic situation where growth is balanced by stability. Monetary policy usually depends on changes to the supply of money in order to influence interest rates and the economy.
Monetary policy is one of the most controversial functions of a central bank. In theory, a monetary policy can be carefully controlled to produce stable prices and an acceptable level of inflation (relative price stability). In practice, however, monetary policy often oscillates between too loose and too tight, creating economic cycles of boom and bust. Monetary policy is one of the fundamental factors a trader will look at when assessing a nation’s currency.
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