What is the purpose of monetary policy?

The purpose of monetary policy is to manage the economy by controlling the money supply and interest rates. This is achieved through various tools and mechanisms employed by a country's central bank, such as setting benchmark interest rates, conducting open market operations, and adjusting reserve requirements for banks. By influencing how much money circulates in the economy and the cost of borrowing, monetary policy aims to achieve economic objectives like controlling inflation, stabilizing the currency, and fostering a healthy level of employment and economic growth.

In contrast to other options, which focus on different aspects of economic management, such as regulating government spending, ensuring market competition, or imposing taxes, monetary policy specifically targets the financial mechanisms that underpin overall economic performance. It affects how individuals and businesses can access credit, make investments, and manage expenses, thereby guiding the broader economic landscape.