Question : The process of increasing the money supply and/or lowering interest rates in order to stimulate economic growth is known as:
Option 1: Fiscal policy
Option 2: Monetary policy
Option 3: Budgetary policy
Option 4: Industrial policy
Correct Answer: Monetary policy
Solution : The correct answer is (b) Monetary policy.
Monetary policy refers to the process by which a central bank, such as the Federal Reserve in the United States, controls the money supply and interest rates to influence economic growth and stability. When the central bank wants to stimulate economic growth, it may increase the money supply by buying government securities or lowering interest rates. These actions aim to make credit more accessible and cheaper, encouraging borrowing and investment by businesses and individuals. Conversely, during periods of inflation or when the economy is overheating, the central bank may decrease the money supply or raise interest rates to slow down economic activity. Fiscal policy, on the other hand, involves the use of government spending and taxation to influence the economy.
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