Monetary policy influences interest rates from "summary" of Economics of Money, Banking and Financial Markets, Business School by Frederic S. Mishkin
Monetary policy plays a crucial role in shaping interest rates within an economy. The central bank, through its various tools, can influence the level of interest rates prevailing in the market. By adjusting the supply of money in the economy, the central bank can effectively impact the interest rates. When the central bank decides to increase the money supply, it puts downward pressure on interest rates. This is because with more money available in the system, individuals and businesses are able to borrow at lower rates. Lower interest rates stimulate spending and investment, which can help boost economic activity. Conversely, if the central bank decides to decrease the money supply, it can push interest rates higher. With less money available in the economy, borrowing becomes more expensive, leading to higher interest rates. Higher interest rates can act as a deterrent to borrowing and spending, which can help cool down an overheated economy. The central bank uses its monetary policy tools - such as open market operations, reserve requirements, and discount rates - to achieve its desired level of interest rates. By buying or selling government securities, adjusting the reserve requirements of banks, or setting the discount rate at which banks can borrow from the central bank, the central bank can influence the money supply and, in turn, interest rates.- Monetary policy is a powerful tool that central banks use to influence interest rates in an economy. By adjusting the money supply through various policy tools, the central bank can impact the level of interest rates prevailing in the market. This, in turn, has significant implications for borrowing, spending, and investment decisions within the economy.
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