Business Degree Certification Practice Test

The control of the money supply by the Federal Reserve is referred to as what type of policy?

1. Fiscal policy

2. Supply-side policy

3. Congressional policy

4. Monetary policy

The correct answer is: Monetary policy

The control of the money supply by the Federal Reserve is referred to as monetary policy because it involves managing the availability and cost of money in the economy. This is accomplished through various tools such as open market operations, the discount rate, and reserve requirements, which influence interest rates and overall economic activity. Monetary policy is distinct from fiscal policy, which pertains to government spending and taxation decisions made by Congress to influence the economy. While fiscal policy focuses on the government's budget and its direct impact on economic growth, monetary policy revolves around the central bank's actions to regulate money supply and interest rates. Supply-side policy, on the other hand, emphasizes stimulating production and economic growth through tax cuts and deregulation, rather than managing the money supply. Similarly, Congressional policy does not specifically address the management of money; instead, it reflects decisions made by legislative bodies regarding law and budget. Thus, referring to the control of the money supply as monetary policy accurately describes the practices adopted by the Federal Reserve to guide the economy.