Which of the following best describes monetary policy?

• A. It uses the central bank to influence interest rates and inflation.
• B. It uses government spending and taxation to influence economic activity.
• C. It involves exchange rate management by the government.
• D. It sets minimum wage laws.

Answer: (A)

Monetary policy is about the central bank using tools to influence the cost of borrowing and the money supply to steer inflation and overall economic activity. The central bank sets policy interest rates and uses open-market operations or other tools to shape how much households and firms borrow and spend. This is why the description that the central bank uses its actions to influence interest rates and inflation is the best fit. For example, lowering the policy rate makes loans cheaper and can boost spending and growth, while raising rates can cool inflation. Government spending and taxes are fiscal policy, not monetary policy; controlling the exchange rate is a different type of intervention sometimes used in specific contexts but is not the core description of monetary policy; and minimum wage laws are labour market or regulatory policies, not monetary policy.