What is the primary purpose of monetary policy?

The primary purpose of monetary policy is to control the money supply and interest rates to achieve macroeconomic goals such as price stability, full employment, and sustainable economic growth. Central banks, like the Federal Reserve in the United States, implement monetary policy through tools such as open market operations, discount rates, and reserve requirements.

By adjusting the money supply, central banks can influence interest rates, which in turn affects borrowing, spending, and investment in the economy. For example, lowering interest rates can encourage borrowing and spending, helping to stimulate economic growth during a recession. Conversely, increasing interest rates can help curb inflation by making borrowing more expensive, thereby reducing spending. This management of the money supply and interest rates is essential for maintaining economic stability and influencing overall economic performance.

The other options focus on various aspects of economic policy but do not capture the core objective of monetary policy itself. Increasing government spending on social programs pertains more to fiscal policy rather than monetary policy. Regulating trade deficits and surpluses involves trade and tariff policies which are outside the scope of monetary policy. Influencing international economic agreements relates to diplomacy and trade relations, again not the central focus of monetary policy.