What does monetary policy involve?

Monetary policy refers to the actions undertaken by a country's central bank to manage the economy by controlling the money supply and interest rates. This process directly influences inflation, employment levels, and overall economic growth. By regulating these factors, the central bank aims to maintain price stability and ensure that the financial system functions effectively.

For example, if the economy is growing too quickly and inflation is rising, the central bank may increase interest rates or reduce the money supply to cool down spending and borrowing. Conversely, if the economy is in a downturn, the central bank might lower interest rates or increase the money supply to encourage borrowing and investment. This strategic manipulation of monetary factors is critical for steering the economy towards desired outcomes, such as sustainable growth and stability.

Other options pertain to fiscal policy or trade policy, which involve government spending, taxation, or international trade regulations. These elements are managed by government entities rather than the central bank, highlighting the distinct roles of monetary and fiscal policies in economic management.