In a developed mixed economy with a certain degree of government intervention, the fiscal and monetary policie of government play an important role in achieving desirable economic balance.
Instruments of monetary policy help to regulate the money supply in a country. When there
is a danger of growing inflation, the government pursues the policy of tight money aimed
at reducing the money supply and limiting investments. Aggregate demand ought
to be decreased. When there is a recession, on the other hand, easy money policy should
be applied and the growth of aggregate demand encouraged.
The main instruments of monetary policy are interest rates and loan terms, increasing
or decreasing the minimum reserve requirements manipulation with the discount rates, and open market operations with goverment securities. If the government sells bonds to the public, the amount of money in ciculation decreases, and vice versa.