Summary: There are two main methods: monetary policy and fiscal policy. When the Federal Reserve Bank raises and lowers the federal funds rate, it is enacting monetary policy.

Summary: There are two main methods: monetary policy and fiscal policy. When the Federal Reserve Bank raises and lowers the federal funds rate, it is enacting monetary policy. The Federal Reserve Bank is the central banking system of the United States.  Monetary policy basically tries to raise or lower interest rates (the cost of borrowing money). Interest rates are thought to directly affect purchasing, for businesses and consumers, especially for larger-dollar items, sometimes called “capital spending”. Lowering rates can stimulate the economy, and raising them can slow it down. The Fed has lowered the fed funds rate to historically low rates at this time in order to stimulate economic growth. China, on the other hand, which has had sustained and torrid economic growth, is raising rates to slow their economy down. Fiscal policy deals with government borrowing and spending. Government spending is thought to stimulate the economy, especially if money is borrowed and it would not otherwise have been spent. You can imagine in your household, if you borrowed some money to spend it that would create some additional economic activity.