GAO Glossary of Terms and Definitions (September 2005)

Monetary Policy

(Economics Term)

A policy affecting the money supply, interest rates, and credit availability that is intended to achieve maximum sustainable output and employment and to promote stable prices (interpreted as a low-inflation environment in practice). Monetary policy is directed by the Federal Reserve System. It functions by influencing the cost and availability of bank reserves through (1) open-market operations (the purchase and sale of securities, primarily Treasury securities), (2) changes in the ratio of reserves to deposits that commercial banks are required to maintain, (3) changes in the discount rate, and (4) changes in the federal fund rate. (See also Discount Rate; Fiscal Policy.)

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