Monetary Policy

Statement

Monetary policy is action by the central bank to influence the level of economic activity in order to achieve macroeconomic objectives, by managing the money supply, the interest rate, or the exchange rate.

• Money supply is the total amount of money in circulation in an economy — the total purchasing power available, comprising cash, coins and bank balances.
• Expansionary monetary policy (EMP) is a lowering of the interest rate (or a raising of the money supply) by the central bank to increase aggregate demand and national income.
• Contractionary monetary policy (CMP) is a raising of the interest rate by the central bank to reduce aggregate demand and demand-pull inflation.

Notes

These terms are examined together as the toolkit of the central bank. The interest-rate transmission mechanism — its primary effect on consumption and investment and its secondary effect through the exchange rate — and the limitations that qualify it are set out in the monetary policy concept. The exchange-rate instrument, which is the one Singapore actually uses, has its own term and is defined in exchange rate policy. Managing the money supply (the required reserve ratio, open-market operations, quantitative easing) is treated only in outline at this level.