• Governments can print or destroy money as a tool for monetary policy.money, money, money image by easaab from Fotolia.com
  
  Monetary economic policy can have wide ranging effects from stimulating the economy to slowing it down so prices are controlled. Because actual paper money has little to no tangible value, governments can print or destroy money to influence economic growth. Though governments only control their own currency, the policy decisions they make can have international consequences through exchange rates.
  
  

Interest Rates

• Monetary economic policy can be used to stimulate the economy or curb inflation, depending on the situation. In the United States, the Federal Reserve determines the interest rates which banks can lend money. A higher interest rate helps to reduce inflation because people, businesses and banks will be more likely to invest money, looking for a good return. Investing the money means less money is spent. This means the demand for goods goes down, along with the price of the good. Lowering the interest rate makes it less beneficial to invest money. Instead people will go out and spend. Consuming goods helps to stimulate the economy. Agencies like the Federal Reserve monitor the economy closely as lowering or raising interest rates too much can have negative effects on the economy as well. Soaring prices or less relative wealth can occur.
  
  

Exchange Rates

• Exchange rates are determined based on one currency's relative value to another. It evaluates how much of one currency could buy another currency. The exchange rate shifts based on the supply and demand for individual currencies. Countries can opt to allow their currency to be free floating or pegged. A free floating currency's value fluctuates based on supply and demand. A pegged currency is purposely devalued by the home country to increase the number of exports. Countries using a pegged system buys and sells its own currency on the open market to keep it at a particular rate. If country A's currency is pegged to country B's currency, country B's consumers will always find country A's products to be relatively cheaper than at home. A pegged currency ensured employment for those in the home country.
  
  

Gold Standard

• The pieces of paper that make money are not worth much. Many nations, especially up until 1971, used a gold standard to justify the use of paper money. Each paper note represented a certain amount of gold that could be obtained if the money holder desired. Gold is easy to identify, rare and generally accepted as something of value. A gold standard can give long term price stability and limits the role of government in issuing too much paper money. On the other hand, the value of gold may not keep up with a fast growing economy. Its value is also totally based on how much gold is available. If a large stock of gold was found suddenly, the price of gold would drop due to increased supply. In 1971, the gold standard collapsed due to countries like France opting to hold gold instead of United States Dollars, along with the high cost of the Vietnam War, that could not be supported simply on gold reserves. Since then, money values have been determined on the open market.