Monetary policy has lived under many guises. But however it may appear, it generally boils down to adjusting the supply of money in the economy to achieve some combination of inflation and output stabilization.
Twin objectives
The monetary policymaker, then, must balance price and output objectives. Indeed, even central banks,that target only inflation would generally admit that they also pay attention to stabilizing output and keeping the economy near full employment.
Monetary policy is not the only tool for managing aggregate demand for goods and services.
Fiscal policy taxing and spending—is another, and governments have used it extensively during the recent global crisis. However, it typically takes time to legislate tax and spending changes, and once such changes have become law, they are politically difficult to reverse. Add to that concerns that consumers may not respond in the intended way to fiscal stimulus (for example, they may save rather than spend a tax cut), and it is easy to understand why monetary policy is generally viewed as the first line of defense in stabilizing the economy during a downturn. (The exception is in countries with a fixed exchange rate, where monetary policy is completely tied to the exchange rate objective.)
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