What type of policy is used to control inflation and stabilize a country’s currency?

Monetary policy is utilized to control inflation and stabilize a country's currency primarily through the management of interest rates and the money supply. Central banks, such as the Federal Reserve in the United States, implement various monetary tools, including adjusting interest rates, open market operations, and reserve requirements, to influence financial conditions in the economy.

When a central bank raises interest rates, it typically leads to higher borrowing costs for consumers and businesses, which can reduce spending and investment. This decrease in demand helps to control inflation. Conversely, lowering interest rates can stimulate economic activity by encouraging borrowing and spending, helping to stabilize the economy during downturns.

Furthermore, monetary policy directly impacts currency stability. For instance, if a central bank adopts a tight monetary policy to combat inflation, it can strengthen the country’s currency by instilling confidence in its value among foreign investors and traders. This contrasts with fiscal policy, which primarily involves government spending and tax policies, and is not as directly effective in controlling inflation and currency effects in real-time. Trade policy involves regulations and agreements that affect international trade, while economic policy encompasses a broader range of strategies, including fiscal and monetary measures but is not specific to inflation and currency stabilization.