Monetary policy is the process by which the government, central bank, or monetary authority of a country controls
(i) the supply of money,
(ii) availability of money, and
(iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.
Monetary theory provides insight into how to craft optimal monetary policy.
Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply.
Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates in order to combat inflation.
Monetary policy should be contrasted with fiscal policy, which refers to government borrowing, spending and taxation.
(From Wikipedia, the free encyclopedia)