Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What is the primary aim of monetary policy?

To influence social welfare
To enhance fiscal budgetary control
To influence aggregate demand
To control tax rates

The correct answer is: To influence aggregate demand

The primary aim of monetary policy is to influence aggregate demand in the economy. Central banks implement monetary policy primarily to manage economic stability by controlling the supply of money available, interest rates, and ultimately influencing spending, investment, and consumption behaviors within an economy. By adjusting interest rates, for example, a central bank can make borrowing cheaper or more expensive, which consequently affects consumer spending and business investment. This manipulation of aggregate demand can help control inflation, promote employment, and encourage economic growth. When aggregate demand is too low, central banks may lower interest rates to stimulate spending; conversely, if demand is too high and inflation is a concern, they may increase rates to cool off the economy. The other options, while relevant to economic discussions, do not encapsulate the core focus of monetary policy. It does not primarily aim to influence social welfare, enhance fiscal budgetary control, or control tax rates directly. Each of these aspects could be influenced by monetary policy indirectly but are not the primary focus of the central banks' objectives.