Monetary policy is the guideline issued by the central
bank, currency board or other regulatory committee that determines the size and
rate of growth of the money supply. This in turn affects the interest rates and
inflation. Consumer spending is affected by the monetary policies because if the
regulatory agencies decrease the reserve requirement or reduce the interest
rates, this creates incentives for banks to loan and business to borrow. This
promote spending on the part of the consumer as well since they can borrow
money at a lower interest rate and new businesses will emerge that would offer
more variety of products or services that consumers may spend for.
