Which term describes the central bank's use of changes in the money supply or the interest rate to stabilize the economy?

Which term describes the central bank's use of changes in the money supply or the interest rate to stabilize the economy?

• A. Fiscal policy
• B. Automatic stabilizers
• C. Monetary policy
• D. Regulatory policy

Answer: (C)

Monetary policy refers to how the central bank uses changes in the money supply and interest rates to smooth the business cycle and stabilize the economy. By increasing the money supply or lowering policy rates, it lowers borrowing costs, stimulates spending and investment, and can reduce unemployment. Conversely, tightening the money supply or raising rates makes borrowing more expensive, cooling demand to keep inflation in check. The central bank uses tools like open market operations (buying or selling government securities), adjusting reserve requirements for banks, and changing the discount rate to influence overall spending and price stability. Fiscal policy, by contrast, involves government decisions on spending and taxes. Automatic stabilizers are built-in mechanisms—such as unemployment insurance and tax receipts—that automatically help dampen fluctuations without active policy changes. Regulatory policy focuses on rules and standards for financial institutions and markets rather than directly steering the economy through money and credit conditions.

Monetary policy refers to how the central bank uses changes in the money supply and interest rates to smooth the business cycle and stabilize the economy. By increasing the money supply or lowering policy rates, it lowers borrowing costs, stimulates spending and investment, and can reduce unemployment. Conversely, tightening the money supply or raising rates makes borrowing more expensive, cooling demand to keep inflation in check. The central bank uses tools like open market operations (buying or selling government securities), adjusting reserve requirements for banks, and changing the discount rate to influence overall spending and price stability.

Fiscal policy, by contrast, involves government decisions on spending and taxes. Automatic stabilizers are built-in mechanisms—such as unemployment insurance and tax receipts—that automatically help dampen fluctuations without active policy changes. Regulatory policy focuses on rules and standards for financial institutions and markets rather than directly steering the economy through money and credit conditions.