How does monetary policy affect interest rates?

How does monetary policy affect interest rates?

Monetary policy affects interest rates through the manipulation of the money supply and the central bank's control over short-term interest rates. When the central bank implements expansionary monetary policy, such as lowering interest rates or increasing the money supply, it aims to stimulate economic growth and increase borrowing and spending. This leads to a decrease in interest rates as the increased money supply lowers the cost of borrowing. Conversely, contractionary monetary policy, such as raising interest rates or reducing the money supply, aims to slow down economic growth and control inflation. This results in an increase in interest rates as borrowing becomes more expensive. Overall, monetary policy plays a crucial role in influencing interest rates and shaping the overall economic conditions.