Monetary policy

A country's central bank is responsible for its monetary policy. In the United States, for example, the Federal Reserve aims to keep the economy growing but not allow it to become overheated.

In a sluggish economy, the Fed may lower the short-term interest rate to loosen credit and allow more cash to circulate in an attempt to stimulate expansion.

Or, if it fears the economy is growing too quickly, it may tighten credit by raising the short-term interest rate to reduce the money supply, in an attempt to rein in potential inflation.

In pursuit of its monetary policy, the Fed can also increase or decrease the money supply by buying or selling government securities.

To avoid a potential recession, for example, the Fed might increase its purchases of US Treasury notes and bonds from banks and brokerage firms, providing them with more money to lend.