Monetary Policy involves central bank actions to influence money supply, interest rates, and credit to achieve economic objectives. Goals: Price stability (controlling inflation—primary), Economic growth (supporting full employment), Financial stability (preventing banking crises), Exchange rate management (external stability). Expansionary monetary policy: Increase money supply, lower interest rates, encourage borrowing and spending, stimulate growth and employment (inflation risk). Contractionary monetary policy: Decrease money supply, raise interest rates, discourage borrowing, control inflation (recession risk). Transmission mechanism: Central bank changes policy rate → Banks adjust lending rates → Borrowers' decisions change → Investment, consumption adjust → Output and prices change. Time lags: Recognition lag (understanding situation), Decision lag (deciding policy), Implementation lag (executing policy), Effect lag (impact on economy)—total lag 6-18 months. Effectiveness factors: Financial system development, Inflation expectations, Supply shocks, Fiscal policy coordination. Limitations: Zero lower bound (rates cannot go below zero easily), Liquidity trap, Lag effects, Structural problems not addressable by monetary policy. Tools: Open Market Operations, Reserve requirements, Discount rate, Quantitative easing. Indian context: RBI policy rate (repo rate); inflation targeting (4% with 2% band); coordination with government. ICAI focus: Policy transmission, goals, tools, limitations. Exam tip: Monetary policy works through interest rates and liquidity; effectiveness depends on expectations and financial system health.