Which policy controls the money supply to influence unemployment and price stability?

• A. Tax policy
• B. Fiscal policy
• C. Monetary policy
• D. Exchange rate policy

Answer: (C)

Monetary policy is the set of actions a central bank uses to manage the money supply and influence interest rates in order to stabilize the economy, including unemployment and prices. By buying or selling government securities, adjusting reserve requirements, and changing the discount rate, the central bank can expand or contract liquidity. When the money supply grows and interest rates fall, borrowing becomes cheaper, spending and investment rise, and unemployment can decline in the short run. But if too much money is chasing too few goods, inflation can climb, challenging price stability. Conversely, tightening the money supply raises rates, cools demand, and can curb inflation, though it may raise unemployment in the short term. Over time, the goal is to keep inflation low and stable while supporting a healthy job market.

Tax policy and other fiscal actions affect overall demand but do not directly control the money supply, and exchange rate policy affects the value of the currency rather than the central bank’s money supply.