What is Monetary Policy?

What is Monetary Policy?

Monetary Policy is a tool used by the central banks all around the world to manage money supply in the economy in order to achieve a desirable growth. The Central Bank controls the money supply by increasing or decreasing the cost of money, the rate of interest.

This is because after 1971, the Gold standard has been removed worldwide and now the modern money is not backed by any gold. Modern money is not the derivative of the gold anymore but it is the derivative of the debt now. So the modern money is stretchable or contractable according to the need of businesses and economy. It is like Elastic money.

Different Types of Monetary System -

Monetary policy can either be expansionary or contractionary in nature. Under an expansionary policy, policy makers increase the money supply in the system by lowering interest rates. This is done mainly for 2 purposes.

- To boost the economic growth &

- to reduce the level of unemployment in the economy

In Contractionary policy, the cost of money is made costly by increasing the rate of interest, which in turn helps to reduce the money supply in the system and combat inflation.

Thus, we can stretch and contract the modern money according to the demand or the economy. Previously, to print new money, the governments MUST had to reserve the same amount of gold before printing it. But in the modern world (After 1971), money is not backed by anything. We can contract and stretch the money supply according to the needs of businesses and economy.

And thus, the Asset holders always win the game of money. This is because if you own any Asset than you MUST have money keep flowing into your bank accounts weather you work, sleep or travel the world. If you want to beat the modern money game than create Assets in your life. An Asset can be anything such as Web properties, books, movies, music, businesses, stocks, bonds, gold, real estate, mutual funds or anything else.