Which type of policy is used to influence the quantity of money in the economy?

• A. Monetary policy
• B. Fiscal policy
• C. Regulatory policy
• D. Trade policy

Answer: (A)

Influencing the quantity of money in the economy is done through monetary policy. The central bank uses tools like open market operations (buying or selling government bonds), changing reserve requirements for banks, and adjusting the discount rate to expand or contract the money supply and to influence short-term interest rates. When the central bank buys bonds, it increases bank reserves, raising the money supply and typically lowering interest rates; selling bonds tightens reserves, reducing the money supply and pushing rates up. Fiscal policy, regulatory policy, and trade policy affect spending, rules, or trade, but they do not directly control the central bank’s money stock. So the type of policy that directly targets the money supply is monetary policy.