The main goal of monetary policy is
Group of answer choices
a. to equalize income disparity among citizens of the United States with Congress passing an increase in the federal minimum wage.
b. to control the amount of public debt sold to foreign states with the Executive Office of the President determining interest rates on government backed securities.
c. to control the interest rates on money lent to foreign states with the International Monetary Fund authorization.
d. to expand the government’s revenue base so as to reduce the deficit with the Internal Revenue Service collecting more taxes.
e. to affect how much money is available to businesses and banks with the Federal Reserve Board using interest rates as the primary tool.
The correct answer and explanation is:
The correct answer is e. to affect how much money is available to businesses and banks with the Federal Reserve Board using interest rates as the primary tool.
Monetary policy is a tool used by a country’s central bank, in this case, the Federal Reserve in the United States, to control the supply of money in the economy. The primary goal of monetary policy is to promote economic stability by managing inflation, reducing unemployment, and ensuring sustainable economic growth. The Federal Reserve uses several mechanisms to achieve this, with one of the most important being the control of interest rates.
Interest rates influence the cost of borrowing money. When the Federal Reserve raises interest rates, borrowing becomes more expensive, which typically slows down economic activity by reducing consumer spending and business investment. Conversely, when interest rates are lowered, borrowing becomes cheaper, which stimulates economic activity by encouraging spending and investment.
Another key element of monetary policy is the adjustment of the money supply. The Federal Reserve can increase or decrease the money supply by engaging in open market operations, where it buys or sells government securities. This has the effect of either injecting or withdrawing money from the banking system, which in turn influences the liquidity available to businesses and individuals.
The Federal Reserve can also set reserve requirements for banks, which determine the amount of money that banks must hold in reserve rather than lending out. By adjusting these requirements, the Fed can control how much money is circulating in the economy.
In short, the main goal of monetary policy is to manage economic conditions by influencing the availability of money and credit, primarily through the manipulation of interest rates.