What is the purpose of monetary policy?

The purpose of monetary policy is fundamentally to manage the money supply and interest rates within an economy. This strategy is primarily executed by a nation's central bank, such as the Federal Reserve in the United States. By manipulating these variables, the central bank aims to achieve various economic objectives, including controlling inflation, fostering employment, and stabilizing the currency.

When the central bank alters the money supply, it can influence economic activity. For instance, increasing the money supply can lower interest rates, encourage borrowing and spending, and stimulate economic growth. Conversely, decreasing the money supply typically raises interest rates, which can help to curb inflation.

In contrast, other choices address different aspects of economic management. Decreasing the national debt, enforcing trading laws, and balancing government budgets are important economic considerations but fall under fiscal policy and regulatory frameworks rather than monetary policy. Thus, choice regarding the management of money supply and interest rates accurately captures the core function of monetary policy.