This is government policy to control the way in which people and businesses spend and save their money. Usually manged by a central bank which is overseen by the government, the two main tools of monetary policy are the interest rate and the money supply.
Governments use monetary policy to manage the aggregate levels of demand throughout the economy, and it is therefore a key tool in controlling inflation.
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Key terms:
Money supply – the total amount of money circulating in an economy
Interest rate – the price paid for borrowing money (or the reward for saving your money in the bank!)
Mortgage – a legal agreement where money is borrowed to purchase land or property, with the lender having the right to take the land/property if the loan is not repaid.