Monetary policy is the method by which the government, central bank, or monetary authority controls the money supply or trade in foreign exchange markets. This policy is usually called expansionary policy or restrictive policy. An expansionary policy multiplies the total money supply in the economy, while a restrictive policy decreases the total supply. Expansionary policy is used to address unemployment in a period of economic decline by lowering interest rates, while restrictive policy aims to raise interest rates to fight inflation. Monetary policy is based on the relationship between interest rates in an economy and the total supply of money. Monetary policy uses a variety of tools to tame exchange rates with other currencies and unemployment. This is done in order to influence outcomes such as economic growth and inflation. A policy is said to be restrictive if it decreases the size of the money supply or increases the interest rate. An expansionary policy increases the size of the money supply or lowers the interest rate. Monetary policies are accommodative if the interest rate is intended to stimulate economic growth, neutral if it is intended neither to encourage growth nor to fight inflation, or restrictive if its objective is to reduce inflation. There are several monetary policy tools available to achieve these outcomes. The Fed has three such tools. Open market operations, reserve requirements and discount window lending. Open market operations are the most important monetary policy tool used by the Fed. These operations involve the Fed buying and selling previously issued U.S. government bonds. Reserve requirements are the percentages of precise types of deposits that banks must...... middle of paper......positive and having a negative effect on ordinary people. This can manifest itself primarily through a change in employment status. The government, however, has many tools to help the situation. These tools can sometimes improve or even worsen the dilemma. They are made to get the economy out of the crisis. But there is no doubt that monetary policy has a huge effect on macroeconomic factors such as GDF, unemployment, inflation and interest rates. Anonymous References (2013). Money, what it is, how it works. Retrieved February 18, 2014, from http://wfhummel.cnchhost.com/monetarypolicy.htmlMcConnell, C.R. & Bruce, S.L. (2012). Economy: principles, problems and policies. (18th edition). New York: McGraw-Hill. North, Gary (2012). Interest rates and monetary policy. Retrieved February 18, 2014, from http://www.lewrockwell.com/north/north492.html