Which of the following best defines monetary policy?

Monetary policy is best defined as the control of the money supply and interest rates. This definition encapsulates the primary goals and tools of monetary policy, which are used by central banks, such as the Federal Reserve in the United States, to influence economic conditions. By adjusting the money supply and manipulating interest rates, central banks can affect inflation, employment levels, and overall economic growth.

When the central bank increases the money supply or decreases interest rates, borrowing becomes cheaper, encouraging spending and investment. Conversely, reducing the money supply or increasing interest rates can help cool off an overheated economy by making loans more expensive, thereby slowing down spending and investment. This balancing act is crucial for maintaining stable economic growth and controlling inflation.

The other options refer to different aspects of economic management: government spending and taxation pertain to fiscal policy; the regulation of banking and financial institutions relates to regulatory policy; and trade agreements and tariffs are part of international trade policy. Each of these plays a distinct role in the broader economic environment, but none specifically addresses the functions and objectives associated with monetary policy.