Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does expansion of credit aim to achieve under monetary policy?

1. Increase government revenue

2. Stimulate economic growth

3. Enhance corporate profits

4. Regulate consumer prices

The correct answer is: Stimulate economic growth

The expansion of credit under monetary policy primarily aims to stimulate economic growth. This is achieved by making borrowing easier and less expensive for individuals and businesses. When interest rates are lowered, it encourages spending and investment as consumers are more inclined to take out loans for purchasing homes, automobiles, and other goods, while businesses invest in expansion and operations due to cheaper financing options. This increase in spending ultimately fosters a robust economy, leading to job creation, increased production, and enhanced consumer demand. While increased government revenue, enhanced corporate profits, or regulating consumer prices may be secondary effects of a growing economy, they are not the primary goal of credit expansion in the context of monetary policy. Instead, the focus is on encouraging economic activity and fostering an environment where growth can occur sustainably.