Economic Policy Questions
Monetary policy affects interest rates through the actions taken by the central bank to control the money supply and influence the cost of borrowing. When the central bank wants to stimulate economic growth, it may implement expansionary monetary policy by decreasing interest rates. This is done by increasing the money supply, which lowers the cost of borrowing and encourages businesses and individuals to take loans and invest. On the other hand, when the central bank wants to control inflation or slow down the economy, it may implement contractionary monetary policy by increasing interest rates. This reduces the money supply, making borrowing more expensive and discouraging spending and investment. Therefore, monetary policy directly impacts interest rates, influencing borrowing costs and ultimately affecting economic activity.