Monetary policy impacts interest rates from "summary" of Macroeconomics for Business by Lawrence S. Davidson,Andreas Hauskrecht,Jürgen von Hagen
Monetary policy refers to the actions taken by a country's central bank to influence the economy. One of the key tools of monetary policy is the setting of interest rates. When the central bank adjusts interest rates, it can have a significant impact on the economy, particularly on borrowing and spending behavior. Interest rates are the cost of borrowing money, and they play a crucial role in the economy. When interest rates are low, borrowing becomes cheaper, which encourages consumers and businesses to take out loans to finance purchases and investments. This increased borrowing and spending can stimulate economic activity and lead to growth. Conversely, when interest rates are high, borrowing becomes more expensive, which can discourage borrowing and spending. This can slow down economic activity and even lead to a contraction in the economy. The central bank adjusts interest rates as part of its monetary policy to achieve specific economic goals. For example, if the central bank wants to stimulate economic growth, it may lower interest rates to encourage borrowing and spending. On the other hand, if the central bank wants to curb inflation, it may raise interest rates to reduce borrowing and spending.- The relationship between monetary policy and interest rates is crucial for understanding how central banks can influence the economy. By adjusting interest rates, central banks can effectively manage borrowing and spending behavior, which in turn can impact economic growth and inflation rates.
