What is the relationship between monetary policy and inflation?

What is the relationship between monetary policy and inflation?

Monetary policy refers to the actions taken by a central bank to manage the money supply and interest rates. It directly influences inflation.

How does increasing interest rates affect inflation?

Increasing interest rates typically reduces inflation. Higher rates make borrowing more expensive, which can decrease spending and investment.

Can you explain how quantitative easing works?

Quantitative easing is a monetary policy where a central bank purchases securities to increase the money supply and encourage lending and investment.

What are the potential risks of loose monetary policy?

Loose monetary policy can lead to higher inflation, asset bubbles, and can undermine the value of the currency if not managed carefully.

How do central banks decide on their monetary policy?

Central banks analyze economic indicators, such as inflation rates, employment levels, and GDP growth, to make informed decisions on monetary policy.