Monetary policyMonetary policy is divided into two categories, restrictive monetary policy and expansionary monetary policy. Contractionary monetary policy is a policy that reduces the money supply and increases the interest rate. It is intended to slow economic growth in order to prevent or slow inflation. Expansionary monetary policy is a policy that lowers the interest rate and increases the money supply. The goal is to stimulate economic growth and bring the country out of recession. There are several monetary policy tools such as open market operations, discount rate and reserve requirements. Open market operations are one of the main tools of monetary policy. It involves buying and selling bonds to regulate the money supply in the country's economy. In terms of expansionary monetary policy, the central bank increases the money supply by purchasing bonds from commercial banks, then funds are increased and commercial banks can use them as loans to the public. When there is more cash in the bank, interest rates will fall and this will boost economic growth. In terms of restrictive monetary policy, the money supply is reduced when the central bank sells bonds to commercial banks, the banks' short-term interest rate increases and thus slows economic growth. The discount rate is the interest rate that commercial banks pay to commercial banks. borrow funds from the central bank (U.S. Department of State, n.d.). This works when the public deposits money into commercial banks; commercial banks also deposit money in the central bank. At the same time, the central bank lends money to commercial banks, and commercial banks lend money to the public. When there is inflation, restrictive monetary policy is applied. The c...... middle of the paper...... [6 March 2014]Tutor2u, n.d., Limitations of GDP in Measuring Standards of Living, available from http://www.tutor2u.net/economics/ content/ topics/livingstandards/limitations_of_gdp.htm [5 March 2014] U.S. Department of State, n.d., Bank Reserves and the Discount Rate, available at http://economics.about.com/od/monetaryandfiscalpolicy/a/bank_reserves. htm [March 3, 2014]Weil, n.d., Fiscal Policy, available at http://www.econlib.org/library/Enc/FiscalPolicy.html [March 4, 2014]Fiscal Policy Workshop IMF, 2009, The Effectiveness of Automatic Stabilizers , available at https ://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=16&cad=rja&ved=0CEkQFjAFOAo&url=http%3A%2F%2Fwww.imf.org%2Fexternal%2Fnp %2Fseminars%2Feng %2F2009%2Ffispol%2Fpdf%2Ffatas.ppt&ei=c_4VU-j6NI6AhAf0lYCQDw&usg=AFQjCNHGi-hdnMfsvPmWfdpw6j9cisYLkQ&bvm=bv.62286460,d.ZGU [4 March 2014]