Monetary Policy and Inflation
Monetary policy can be used to control inflation. Inflation is defined as continuing increases in price levels. Since price level is a monetary variable, monetary policy can affect it. Contractionary monetary policy has the effect of reducing inflation by reducing upward pressure on price levels.
Note that inflation can also be affected by fiscal policy. However, contractionary fiscal policy is often politically unpopular, because it involves spending cuts and tax increases. Thus, politicians favor the use of monetary policy to control inflation.
Read more about this topic: Contractionary Monetary Policy
Famous quotes containing the words monetary and/or policy:
“There is no legislation—I care not what it is—tariff, railroads, corporations, or of a general political character, that all equals in importance the putting of our banking and currency system on the sound basis proposed in the National Monetary Commission plan.”
—William Howard Taft (1857–1930)
“A policy is a temporary creed liable to be changed, but while it holds good it has got to be pursued with apostolic zeal.”
—Mohandas K. Gandhi (1869–1948)