Monetary policy refers to the actions of a central bank to manage the money supply and interest rates in an economy. The goal of monetary policy is to promote economic growth, stability, and low inflation. Central banks use various tools such as setting interest rates, buying or selling government securities, and changing reserve requirements to influence the money supply and credit conditions in the economy.

Monetary policy works by affecting the supply of money and credit in the economy. When a central bank sets interest rates, it influences the cost of borrowing for consumers and businesses. Lower interest rates make borrowing cheaper, which can stimulate economic growth by encouraging investment and consumption. On the other hand, higher interest rates discourage borrowing and can slow down inflation. Additionally, when a central bank buys or sells government securities, it can also impact the money supply. Buying securities injects money into the economy, while selling securities removes money from the economy.

In conclusion, monetary policy plays a crucial role in managing the economy. By using various tools, central banks can control the money supply and interest rates to promote economic growth, stability, and low inflation. Understanding how monetary policy works is essential for individuals, businesses, and governments to make informed decisions about their financial affairs.