What policy is implemented when a government buys bonds to inject money into circulation?

The correct response highlights the concept of monetary policy, which concerns the management of a country's money supply and interest rates, primarily handled by a nation's central bank. When a government purchases bonds, it is essentially increasing the money supply in the economy. This action is known as open market operations, a key tool of monetary policy.

By buying bonds, the government provides financial institutions with more liquidity, allowing them to lend more money. This injection of funds into circulation is intended to stimulate economic activity, encourage spending and investment, and can help lower interest rates, making borrowing cheaper for consumers and businesses. This is particularly important during economic downturns when the goal is to spur growth.

In contrast, fiscal policy pertains to government spending and taxation decisions, which are not directly influenced by bond purchases. Trade policy involves regulations and agreements that govern international trade and does not relate to the manipulation of the money supply. Lastly, exchange policy refers to the management of a country's currency value in relation to others, which is also different from the actions described in this scenario. Overall, understanding the distinction between these policies is crucial for grasping how governments manage economic conditions.