What policy centers on controlling the money supply and interest rates to influence the economy?

• A. Stagflation
• B. Deficit spending
• C. Multiplier effect
• D. Monetary policy

Answer: (D)

Monetary policy is the approach that centers on controlling the money supply and influencing interest rates to steer the economy. A central bank uses tools like open market operations (buying or selling government securities), setting reserve requirements for banks, and adjusting the policy rate to expand or contract credit. When the economy needs a boost, increasing the money supply or lowering rates encourages borrowing and spending; when inflation is high or demand is overheating, tightening the money supply or raising rates dampens spending. The other terms describe a condition (stagflation), a fiscal policy tool (deficit spending), or a propagation concept of spending (multiplier effect), none of which directly refer to the policy that governs money supply and interest rates.