Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following best describes monetary policy?

1. Regulations on employment

2. Taxation levels

3. Control of interest rates and money supply

4. Import and export tariffs

The correct answer is: Control of interest rates and money supply

Monetary policy is primarily concerned with managing the economy's money supply and interest rates to achieve macroeconomic goals such as controlling inflation, maintaining employment levels, and promoting economic growth. This form of policy is executed by a country's central bank, which regulates the amount of money circulating in the economy and influences interest rates. By adjusting interest rates, the central bank can either encourage borrowing and spending (by lowering rates) or discourage it (by raising rates), thus affecting overall economic activity. Furthermore, controlling the money supply involves various tools such as open market operations, discount rates, and reserve requirements, all aimed at stabilizing the economy. The other options, while important aspects of economic policy, do not encapsulate monetary policy's core function. Employment regulations relate more to labor policies, taxation involves fiscal measures rather than monetary control, and tariffs deal specifically with international trade, rather than the domestic monetary environment. Therefore, the description of monetary policy as the control of interest rates and money supply is accurate and encompasses its essential objectives and mechanisms.