What does "monetary policy" refer to?

Monetary policy refers to the actions taken by a central bank or monetary authority to manage the money supply and interest rates in an economy. These actions are aimed at achieving macroeconomic objectives such as controlling inflation, maintaining employment levels, and stabilizing the currency. By adjusting the money supply, the central bank can influence economic activity—essentially deciding how much money is circulating and at what cost in terms of interest rates.

For instance, if the central bank increases the money supply, it typically lowers interest rates, which can encourage borrowing and spending, leading to economic growth. Conversely, reducing the money supply can help control inflation by making borrowing more expensive, slowing down economic activity.

The other options involve different aspects of economic management. Government spending is directly related to fiscal policy rather than monetary policy. Regulation of foreign exchange pertains to how countries manage their currency values and trade, which is also outside the scope of monetary policy. Establishing credit ratings involves assessing the creditworthiness of borrowers, which, while important in finance, does not fall under the definition of monetary policy.