Certified Financial Management Specialist Practice Exam

What is the primary goal of monetary policy?

1. To control the money supply

2. To manage inflation, unemployment, and exchange rates

3. To regulate stock market performance

4. To set corporate tax rates

The correct answer is: To manage inflation, unemployment, and exchange rates

The primary goal of monetary policy is to manage inflation, unemployment, and exchange rates. Central banks, such as the Federal Reserve in the United States, employ monetary policy to create a stable economic environment. They adjust interest rates and the money supply to influence economic activity. When central banks lower interest rates, borrowing becomes cheaper, which can stimulate spending and investment, potentially reducing unemployment. Conversely, if the economy is overheating and inflation is rising, they may increase interest rates to cool off spending. Furthermore, managing inflation is critical because high inflation erodes purchasing power, while deflation can lead to reduced consumer spending and economic stagnation. Exchange rates also play a crucial role in determining a country’s competitiveness in international trade, so monetary policy can have indirect impacts on the value of the national currency, which, in turn, affects export and import dynamics. The other options, while related to economic conditions, do not encapsulate the primary goals of monetary policy. Controlling the money supply is a means to reach broader goals like managing inflation and unemployment rather than an end in itself. The regulation of stock market performance and setting corporate tax rates fall under fiscal policy rather than being direct objectives of monetary policy.