Certified Financial Management Specialist Practice Exam

What is the main purpose of monetary policy?

1. Control corporate taxes

2. Influence consumer spending

3. Control money supply

4. Regulate financial statements

The correct answer is: Control money supply

The primary purpose of monetary policy is to control the money supply within an economy. This control is vital for managing inflation, influencing interest rates, and ensuring the stability of the financial system. By adjusting the money supply, central banks aim to achieve specific economic objectives, such as promoting maximum employment, stabilizing prices, and fostering economic growth. When a central bank modifies the money supply, it can affect the availability and cost of credit. For instance, if the bank increases the money supply, it can lower interest rates, which typically encourages borrowing and spending by consumers and businesses. Conversely, reducing the money supply can lead to higher interest rates, which may help cool off an overheated economy and control inflation. The other options, while they may seem related to economic activity, do not encapsulate the fundamental goal of monetary policy. Corporate taxes and financial statement regulation are more aligned with fiscal policy or regulatory frameworks rather than the objectives central banks aim to achieve through monetary policy. Influencing consumer spending is indeed an important consequence of monetary policy, but it is not its primary purpose; rather, it results from the manipulation of the money supply.