What is the primary purpose of monetary policy?

The primary purpose of monetary policy is to manage the money supply and interest rates. This involves the actions taken by a country's central bank to influence the availability and cost of money in the economy. Through controlling interest rates and adjusting the money supply, monetary policy aims to achieve key economic objectives such as controlling inflation, maintaining employment levels, and fostering economic growth.

When the central bank, such as the Federal Reserve in the United States, raises or lowers interest rates, it influences borrowing and spending behavior among consumers and businesses. Lower interest rates typically encourage borrowing and stimulate spending, which can help boost economic growth during downturns. Conversely, increasing interest rates can help cool down an overheated economy to control inflation.

The other options focus on different aspects of economic policy. Regulating government spending and taxation pertains more to fiscal policy. Establishing trade agreements targets international trade relations, while promoting local business growth through subsidies deals with government support for specific industries or sectors. Each of these areas plays a role in the overall economy but does not encapsulate the primary function of monetary policy as effectively as managing the money supply and interest rates.