Monetary policy is composed of the certain mechanism of bringing changes to the money supply by the act of drafting, announcing, and implementing the decisions taken by the central bank, currency board, or other authorities involved. These institutions also have the authority to control the channels through which the money enters the economy.
Monetary policy aims to manage the money supply and interest rates according to the economic situations. These policies aim to control macroeconomic affairs such as inflation, consumption, growth, and liquidity of money in the economy. These goals can only be achieved by actions such as making changes to the interest rate, buying or selling of government bonds, regulating foreign exchange rates, and changing the number of money banks require to give loans.
Monetary policy is established keeping in view the condition of GDP, inflation, geopolitical developments in the international market and concerns of the industrial market as well. These policies aim to achieve some mandatory goals of rising GDP, decreasing inflation and unemployment. Monetary policy is very important for the economy as it almost controls every aspect of the economic activity. It is important for every state to establish stable and applicable monetary policy according to the needs of the country.