Which statement correctly describes monetary policy?

Which statement correctly describes monetary policy?

• A. Fiscal policy uses tax changes to influence demand.
• B. Monetary policy uses changes in the money supply or the policy interest rate to stabilize the economy.
• C. Monetary policy relies on wage negotiations.
• D. Fiscal policy uses exchange rate adjustments.

Answer: (B)

Monetary policy steers aggregate demand through the money supply and interest rates. When the central bank changes how much money is in circulation or adjusts the policy rate, borrowing becomes cheaper or more expensive, which influences spending, investment, and overall economic activity. The goal is to stabilize the economy—controlling inflation while supporting growth and employment—using tools like open market operations, reserve requirements, and the policy rate. The statement that best captures this describes monetary policy as using changes in the money supply or the policy interest rate to stabilize the economy. Fiscal policy, by contrast, relies on government spending and tax changes to influence demand, not the money supply or interest rates. Wage negotiations describe labor market dynamics rather than the central bank’s policy toolkit. Exchange rate adjustments can be affected by monetary policy but are not the defining feature of monetary policy, which is centered on money supply and interest rates to smooth economic fluctuations.

Monetary policy steers aggregate demand through the money supply and interest rates. When the central bank changes how much money is in circulation or adjusts the policy rate, borrowing becomes cheaper or more expensive, which influences spending, investment, and overall economic activity. The goal is to stabilize the economy—controlling inflation while supporting growth and employment—using tools like open market operations, reserve requirements, and the policy rate. The statement that best captures this describes monetary policy as using changes in the money supply or the policy interest rate to stabilize the economy.

Fiscal policy, by contrast, relies on government spending and tax changes to influence demand, not the money supply or interest rates. Wage negotiations describe labor market dynamics rather than the central bank’s policy toolkit. Exchange rate adjustments can be affected by monetary policy but are not the defining feature of monetary policy, which is centered on money supply and interest rates to smooth economic fluctuations.