Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does monetary policy encompass?

1. Government policy on taxation

2. Regulation of labor markets

3. Government policy on the money supply and interest rates

4. Implementation of trade tariffs

The correct answer is: Government policy on the money supply and interest rates

Monetary policy primarily involves the actions taken by a country's central bank or monetary authority to manage the economy through the regulation of money supply and interest rates. Its main goals are to control inflation, stabilize the currency, and achieve full employment. By adjusting interest rates, the central bank influences borrowing costs for individuals and businesses, which in turn affects spending and investment in the economy. For instance, lowering interest rates makes borrowing cheaper, encouraging spending and investment, leading to economic growth. Conversely, increasing rates can help curb inflation by discouraging borrowing and spending. This manipulation of the money supply is a critical component of how monetary policy seeks to maintain economic stability. The other choices relate to different areas of government policy. Taxation is part of fiscal policy, which focuses on government spending and tax revenues rather than the money supply. Regulation of labor markets does not fall under monetary policy; it is primarily concerned with employment standards, wages, and labor relations. Finally, trade tariffs pertain to international trade policy and protectionism, focusing on the imposition of taxes on imported goods rather than managing domestic money supply or interest rates.