Effort to fight inflation or stimulate economy by controlling
availability of spending money for consumers and businesses; used to attain stable prices with little or no inflation,
maximum employment, and economic growth at the maximum rate the U.S. economy can sustain over a long time.
Most economists believe monetary policy requires stable
prices because they are essential if the highest levels of employment and economic growth are to be achieved in the
long run. In the United States, the Board of Governors of the
Federal Reserve Board steers monetary policy. Increasing the
amount of money and credit in the U.S. economy typically
triggers a chain of events that causes interest rates to fall.
Lower interest rates normally increase demand for items that
most people buy on credit, such as new houses and cars.
Lower interest rates also encourage businesses to invest in
new factories, offices, and machines that they also pay for
with credit.
The firms that produce these goods respond to the increased demand of consumers and businesses by increasing
production and hiring more workers. The added income
these workers earn is then spent on other goods, which other
manufacturers must now produce in larger quantities. As
they hire more workers to accomplish this, employment and
economic growth both rise.
Problems result when the Federal Reserve lets the money
supply grow too quickly or too slowly. If the Federal Reserve
expands the money supply by too much, increased demand
for products outstrips the ability of manufacturers to produce them, and inflation results. Higher rates of inflation ultimately choke off the economic expansion. Too little money
growth results in high interest rates, reducing demand for
interest-sensitive products and lowering levels of employment and economic growth.
—Saranna R. Thornton
References
Board of Governors of the Federal Reserve System. The
Federal Reserve System: Purposes and Functions.
Washington, DC: U.S. Government Printing Office, 1994.