What is the main purpose of monetary policy?

Monetary policy primarily aims to influence the overall level of economic activity, specifically aggregate demand, by managing the money supply in the economy. By adjusting interest rates and controlling how much money is circulating, monetary authorities like central banks can stimulate or slow down economic activity. For instance, lowering interest rates makes borrowing cheaper, encouraging spending and investment, which can boost aggregate demand. Conversely, raising interest rates can help to temper demand and control inflation.

While controlling inflation rates is a significant goal of monetary policy, it is considered more of a result of the broader objective to manage aggregate demand. Each of the other choices focuses on narrower objectives or functions that monetary policy may indirectly influence, but the overarching purpose remains centered on shaping aggregate demand to promote economic growth and stability.