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PPGPortal > Home > Concept Dictionary > K, L, M > Monetary Policy

Monetary Policy 

The setting of the money supply by policymakers in the central bank.

(Peter Dungan, Toronto PPG1002H, and Mankiw, N. Gregory, Ronald Kneebone, Kenneth J. McKenzie and Nicholas Rowe. 2008. Principles of Macroeconomics, 4th Canadian ed. Toronto: Thomson Nelson.)


Monetary policy is one of the two major forms of stabilization policy and it works by affecting the level of aggregate demand in the economy. By increasing the money supply, the bank can raise the level of aggregate demand and thereby affect the level of output, and usually prices, in the economy. Similarly, by contracting the money supply, the central bank lowers the level of aggregate demand, thereby lowering the level of output and prices.


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