What does monetary policy involve?

Monetary policy refers specifically to the methods employed by a central bank, such as the Federal Reserve in the United States, to control the supply of money in the economy and influence interest rates. By managing the money supply and setting interest rates, monetary policy aims to achieve macroeconomic goals such as controlling inflation, fostering maximum employment, and stabilizing currency.

When the central bank adjusts the money supply, it can increase or decrease the amount of money available for consumers and businesses, which in turn affects spending and investment in the economy. Lowering interest rates can encourage borrowing and spending, while raising rates can help cool down an overheating economy.

The other choices listed involve different aspects of economic policy. Adjusting government spending is part of fiscal policy, which deals with the government's budget and how it influences the economy through expenditures and revenues. Setting tax rates, also a fiscal policy measure, directly affects individuals' disposable income and business investment decisions. Implementing trade tariffs is related to trade policy, aiming to affect foreign trade dynamics and domestic industries. Each of these options plays a role in economic management, but they fall outside the scope of monetary policy, which is exclusively focused on the money supply and interest rates.