Which of the following is an example of monetary policy?

Question

BlackTom AI · Accepted Answer

Monetary policy uses central bank tools (interest rates, reserve requirements, open market operations) to control the money supply, credit conditions, inflation, and aggregate demand. The Reserve Bank of India (RBI) is the central bank, and one of its principal tools is changing the interest rate it charges commercial banks for short-term loans (commonly the repo rate). A reduction in that rate directly alters borrowing costs across the economy.

Step-by-step reasoning:
1. Identify the actor and tool: The actor is the RBI (central bank) and the tool is an interest-rate change on loans to commercial banks (repo rate).
2. Mechanism: When the RBI lowers the rate it charges banks, commercial banks pay less to borrow from the central bank. This reduces their cost of funds.
3. Transmission: Lower bank funding costs typically lead banks to reduce the interest rates they charge customers and/or increase lending volume.
4. Outcome: Increased lending expands the money supply and stimulates spending and investment, affecting aggregate demand and inflation — the primary targets of monetary policy.
5. Therefore, reducing the interest rate the central bank charges is a direct monetary policy action.

No numerical calculation is required here because the concept is qualitative: it’s about which institution and instrument are used to influence macroeconomic variables.

Why this option is correct: It is a textbook example of monetary policy because it is a central bank action adjusting interest rates to influence credit and money supply.

Why other types of actions would be incorrect: Fiscal policy (government tax changes or spending) is implemented by the government, not the central bank. Administrative controls on prices or direct subsidies are policy tools but not monetary policy. Changes to bank capital rules or prudential regulations are regulatory (macroprudential), distinct from conventional monetary policy.

Conclusion: The correct answer is "The Reserve Bank of India reduces the interest rate it charges for lending money to commercial banks," which matches the provided answer.

Which of the following is an example of monetary policy?单项选择题

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