Money Supply

Monetary Policy is important tool used by the government and economists in order to manipulate the current economic situation as much as possible. For example since 1993, monetary policy in the UK has been used primarily to keep inflation below a rate set by the government.

Monetary policy is the use of interest rates and the level of the money supply to manage the economy. Interest rates were always used to be set by the government, but the nowadays the control over interest rates has been passed to the Central Bank. The 'operational independence' of the Central Bank means that it can set targets for inflation and set interest rates at the level most appropriate to achieve those targets. The level is set at monthly meetings of the 'Monetary Policy Committee'. A majority decision of the Committee is all that is required to change the level of interest rates.

Using this policy, the central bank uses four techniques in order to control the Money supply. The first and the most commo...