monetary policy

Governments can reach target GNP and control economic cycles by changing money price and availability {monetary policy}| {monetary theory}.

money supply: printing money

Governments can increase or decrease money in circulation {money supply} by printing or not printing money.

money supply: bonds

Governments can sell and buy bonds at fixed interest rates for different periods, such as three-month bonds and thirty-year bonds.

money supply: bank loans

Governments can raise or lower their bank-loan interest rate, the discount rate. If discount rate is lower, banks can charge customers lower loan interest rate, so people borrow more and money in circulation increases.

money supply: reserves

Governments can require banks to keep lower or higher percentages of money to cover loans, by the reserve ratio. If reserve ratio is lower, banks can loan more, people can borrow more, and circulating money increases.

interest rate

Printing money, decreasing discount rate, decreasing reserve ratio, and offering bonds increases money supply. When money supply increases, interest rates decrease, because money is less valuable. When interest rates decrease, money supply increases, because people save less.

Not printing money, increasing discount rate, increasing reserve ratio, and buying bonds decreases money supply. When money supply decreases, interest rates increase, because money is more valuable. When interest rates increase, money supply decreases, because people save more.

government

People receive income from working, spend for personal expenses, and have expectations about economy. Income changes slowly, but spending and expectations can change quickly. Government can affect people's spending and expectations. Government can raise and lower money supply, independently of taxes and spending, because it is the largest and most powerful institution and can incur or pay down debt. See Figure 1.

To stop expansion and inflation, governments increase interest rates and decrease money supply, to encourage saving and discourage borrowing. See Figure 2.

To stop recession, governments decrease interest rates and increase money supply, to encourage spending and encourage borrowing. See Figure 3.