ACCA Financial Management (F9) Certification Practice Exam

Which variable is primarily controlled under monetary policy?

1. Government spending

2. Price controls

3. Interest rates

4. Trade tariffs

The correct answer is: Interest rates

The correct choice focuses on interest rates, which are a key variable in monetary policy. Monetary policy is primarily the responsibility of a country's central bank and involves managing the money supply and interest rates to achieve macroeconomic objectives such as controlling inflation, maintaining employment levels, and fostering economic growth. Interest rates are a crucial lever in this policy. When the central bank adjusts interest rates, it influences borrowing and spending by businesses and consumers. Lowering interest rates typically stimulates economic activity by making loans cheaper, whereas raising interest rates may help to cool down an overheating economy by making borrowing more expensive. This dynamic plays a critical role in managing inflation and stabilizing the economy. In contrast, government spending is directly managed through fiscal policy, which involves decisions made by the government regarding taxation and expenditure. Price controls refer to government-imposed limits on prices, which are also outside the realm of monetary policy. Trade tariffs are duties imposed on imported goods, reflecting trade policy rather than monetary policy objectives. Thus, while all the options might play roles in economic management, interest rates are specifically the variable controlled under monetary policy.