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What is Accommodative Monetary Policy?

Accommodative monetary policy is when a central bank makes it easier for banks and consumers to borrow money by lowering the interbank exchange rate.

A central bank, such as the Federal Reserve Bank in the United States, can influence the economy by loosening or tightening the money supply. Loosening the money supply is known as accommodative policy, because it give the businesses and individuals in the country access to a higher degree of liquidity.

The central bank can do this in two ways: one is to reduce the Federal Funds Rate, which is the rate at which banking institutions can borrow money from the Fed, and this translates directly into the rate of the overnight interbank rate, which is the rate at which banks will make short term loans to each other overnight, and the Prime Rate, which is the best loan rate banks will give their customers.

More liquidity and lower rates means that more loans will be made nationwide, which benefits cash currency into the economy, and is a much better way to go about it than just printing more bills.

Keywords: liquidity, federal funds rate, government bonds, prime rate, banking institutions, central banks, overnight interbank rate, money supply,