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Article: Monetary Theory
- Article from:
- Gale Encyclopedia of U.S. Economic History
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MONETARY THEORY
Monetary theory holds that a government can manage the level of economic activity by controlling interest rates and the amount of money in circulation. In general, pumping more money into the economy leads to more buying and selling; shrinking the money supply leads to less economic activity, possibly even a recession. A tight monetary policy is one that involves higher interest rates and limits the amount of new money going into circulation. An easy or loose monetary policy involves lower interest rates and more money entering circulation. The government agency responsible for the money supply in the United States is the Federal Reserve Board. The Federal Reserve tries ...