Money is usually defined by reference to the functions it performs - Leaving Cert Economics - Question 6 - 2011

Monetary policy refers to the actions taken by a central bank, such as the European Central Bank (ECB), to manage the economy by controlling the money supply, interest rates, and the availability of credit. The primary goals of monetary policy are to ensure price stability, promote economic growth, and achieve low unemployment.

The central bank uses various tools to implement monetary policy. For example, it can adjust interest rates to influence borrowing and spending. Lowering interest rates typically encourages borrowing, stimulating economic activity. Conversely, raising interest rates can help cool down an overheating economy by making borrowing more expensive.

Furthermore, monetary policy can involve open market operations, where the central bank buys or sells government securities to influence the amount of money in circulation. These actions directly affect liquidity within the banking system, impacting the broader economy.

In summary, monetary policy is a fundamental economic tool that central banks use to regulate the financial system and achieve macroeconomic goals.