Monetary policy is a regulatory policy by which a country's central bank or monetary authority controls the money supply, the availability of bank credit, and the cost of money i.e. the rate of Interest.Monetary policy/monetary management is considered an important tool of economic management in India. The RBI controls money supply and bank credit. The Central Bank has the duty to ensure that legitimate credit needs are satisfied and at the same time that credit is not used for unproductive and speculative purposes. The RBI rightly defines its credit policy as a policy of controlled expansion. Contractionary monetary policies and expansionary monetary policies involve changing the quantity of money supply in a country. Expansionary monetary policy is simply a policy that expands the money supply, while contractionary monetary policy contracts a country's currency supply. EXPANSIONARY MONETARY POLICY In the United States, when the Federal Open Market Committee wishes to amplify the money supply, it can make a move combining three things: 1. Buy securities on the open market, known as open market operations2. Lower the federal discount rate3. Lower reserve requirementsThe interest rate is directly affected by these factors. When the Federal Bank buys securities on the open market, it increases the price of those securities. The federal discount rate is an interest rate, so lowering it essentially means lowering interest rates. If the Federal Reserve decided to lower reserve requirements instead, this would cause banks to increase the amount of money they can invest. This causes the price of investments such as bonds to rise, so interest rates must fall. No matter what tool the Fed uses to expand money, i.e. with half the paper and fewer domestic goods sold abroad, the trade balance collapses. Additionally, higher interest rates cause the cost of financing capital projects to be higher, so capital investment will be lower. Therefore, restrictive monetary policy:1. Restrictive monetary policy causes bond prices to fall and interest rates to rise.2. Rising interest rates lead to lower levels of capital investment.3. Higher interest rates make domestic bonds more attractive, so demand for domestic bonds increases and demand for foreign bonds decreases.4. Demand for domestic currency increases and demand for foreign currency decreases, causing the exchange rate to rise. (The value of the domestic currency is now higher than foreign currencies)5. A higher exchange rate causes a decrease in exports, an increase in imports and a decrease in the trade balance.