What is the main goal of monetary policy?

The main goal of monetary policy is to manage inflation and stabilize the currency. Central banks, like the Federal Reserve in the United States, implement monetary policy primarily to control the supply of money in the economy, which directly influences inflation rates. By adjusting interest rates and using other tools, central banks aim to maintain price stability, ensuring that inflation is kept within a target range. Stable prices contribute to a more predictable economic environment, fostering consumer and business confidence. When inflation is managed effectively, it helps maintain the value of the currency, encouraging investment and economic growth.

While controlling unemployment and promoting fiscal responsibility are important economic goals, they are often secondary outcomes of effective monetary policy. High inflation can lead to uncertainty and erode the purchasing power of currency, making the focus on managing inflation and stabilizing currency critical for overall economic health. Similarly, regulating trade balances influences international trade dynamics but does not directly pertain to the primary objectives of domestic monetary policy.