How does monetary policy influence the economy?

Monetary policy primarily influences the economy by controlling the supply and cost of borrowing money. It is enacted by a country's central bank through various tools, such as adjusting interest rates and through open market operations. When the central bank lowers interest rates, borrowing becomes cheaper, encouraging both individuals and businesses to take loans for spending and investment. This increased borrowing can stimulate economic activity, leading to growth.

Conversely, when the central bank raises interest rates, it makes borrowing more expensive, which can slow down spending and investment, thereby cooling off an overheating economy. This balance of controlling money supply and interest rates is crucial for managing inflation and fostering a stable economic environment.

The other options do not accurately reflect the function of monetary policy. Managing government spending pertains to fiscal policy, while offering incentives to businesses often falls under tax policy or subsidies, rather than monetary operations. Conducting fiscal audits is related to assessing the efficiency of governmental spending and financial reporting, which is separate from monetary policy goals.