A central bank or other regulatory agency conducts monetary policy when it sets interest rates and the size of the money supply. When a central bank increases the rate at which the money supply grows or lowers interest rates, it is conducting expansionary monetary policy. Contractionary monetary policy is when a central bank decreases the rate at which the money supply grows or raises interest rates.
In the United States, monetary policy is conducted by the Federal Reserve Board (specifically, the Federal Open Market Committee). The Fed can buy and sell U.S. Treasury securities, set interest rates (the discount rate), and place reserve requirements on banks in order to manipulate the money supply.
Related Terms: Fiscal Policy