ACCA Financial Management (F9) Certification Practice Exam

Which of the following describes the government's role in monetary policy?

1. Directly sets the prices of goods

2. Regulates the economy by controlling the money supply

3. Determines government spending levels

4. Establishes exchange rates directly

The correct answer is: Regulates the economy by controlling the money supply

The government's role in monetary policy is accurately described by the option that states it regulates the economy by controlling the money supply. In a monetary policy context, controlling the money supply is crucial because it directly influences interest rates, inflation rates, and overall economic activity. Central banks, which are often government entities or closely related to them, adjust the money supply through various tools, such as open market operations, reserve requirements, and the discount rate. By regulating the money supply, the government can either stimulate the economy by increasing liquidity, which generally lowers interest rates and encourages borrowing and spending, or it can cool down an overheating economy by tightening the money supply, which raises interest rates and discourages excessive spending. This balancing act is essential for achieving macroeconomic goals such as stable prices and full employment. The other options describe roles that are either not part of monetary policy or are managed in different contexts. For example, directly setting the prices of goods pertain more to price controls or fiscal policies rather than monetary policies. Similarly, determining government spending levels is a function more closely associated with fiscal policy, which deals with government budgets and taxation rather than the supply of money. Establishing exchange rates directly is usually associated with foreign exchange policy or interventions and is not a primary role