Which action is a direct tool of monetary policy to influence borrowing costs?

• A. Raise or lower the interest rates
• B. Impose tariffs
• C. Set the exchange rate
• D. Increase government spending

Answer: (A)

Raising or lowering the policy rate is the direct way a central bank influences borrowing costs. When the rate is cut, banks can borrow more cheaply and typically pass lower costs to consumers and businesses in the form of lower loan rates, which encourages borrowing and spending. When the rate is raised, borrowing becomes more expensive, cooling demand and helping to control inflation. Tariffs affect import prices and trade dynamics, not the cost of credit. Setting the exchange rate is not a direct instrument for adjusting borrowing costs, and increasing government spending is fiscal policy, not monetary policy, so it doesn’t directly change the price of credit.