Which statement about monetary policy is accurate?

• A. Monetary policy has no effect on interest rates.
• B. Expansionary policy lowers policy rates to stimulate growth.
• C. Expansionary policy raises policy rates to stimulate growth.
• D. Contractionary policy lowers policy rates.

Answer: (B)

Lowering the policy rate is a classic way monetary policy stimulates the economy. When a central bank lowers its policy rate, it reduces the cost of borrowing across the financial system. Cheaper credit makes households and businesses more willing to spend and invest, which boosts overall demand and supports growth. This is the essence of expansionary policy: it aims to spur activity by easing monetary conditions, including lower interest costs and usually an easier money supply. The other statements don’t fit this mechanism because policy rates do respond to policy actions, expansionary moves involve cutting, not raising rates, and contractionary moves raise rates to cool activity rather than lower them.