Which option best describes the primary tools used by monetary policy?

• A. Government spending and taxation
• B. Interest rates and money supply
• C. Corporate tax incentives
• D. Trade policy

Answer: (B)

Monetary policy uses tools that influence the money supply and the cost of borrowing in the economy. The central bank sets policy interest rates and uses open market operations, reserve requirements, and the discount rate to adjust how much money banks can lend. Lowering rates or increasing liquidity makes borrowing cheaper and expands the money supply, while raising rates or tightening liquidity has the opposite effect.

What you see here are tools that the government doesn’t directly use to run deficits or incentivize sectors. Government spending and taxation are fiscal policy tools, corporate tax incentives are also fiscal, and trade policy affects international economics more broadly. Because monetary policy centers on shaping money supply and borrowing costs, the description with interest rates and money supply is the best match.