3.2-Monetary Policy

Question 1

What is monetary policy?

Answer 1

Monetary policy refers to the actions taken by a country’s central bank to control the money supply and interest rates.

Question 2

True or False: The primary goal of monetary policy is to control inflation.

Answer 2

True

Question 3

What are the two main types of monetary policy?

Answer 3

Expansionary and contractionary monetary policy.

Question 4

Fill in the blank: The central bank of the UK is known as the _______.

Answer 4

Bank of England

Question 5

What tool does the central bank use to influence interest rates?

Answer 5

Open market operations.

Question 6

What is the purpose of lowering interest rates?

Answer 6

To stimulate economic growth by encouraging borrowing and spending.

Question 7

What happens to the money supply when the central bank sells government bonds?

Answer 7

The money supply decreases.

Question 8

True or False: Contractionary monetary policy is used to combat high inflation.

Answer 8

True

Question 9

What is quantitative easing?

Answer 9

A non-traditional monetary policy where the central bank purchases longer-term securities to increase the money supply.

Question 10

Multiple Choice: Which of the following is NOT a tool of monetary policy? A) Open market operations B) Reserve requirements C) Tax policy

Answer 10

C) Tax policy

Question 11

What effect does an increase in the reserve requirement have on the economy?

Answer 11

It decreases the money supply and can lead to higher interest rates.

Question 12

Fill in the blank: The interest rate at which banks lend to each other overnight is called the _______.

Answer 12

Interbank rate

Question 13

What is the role of the Monetary Policy Committee (MPC) in the UK?

Answer 13

To set the Bank of England’s official interest rate.

Question 14

True or False: Expansionary monetary policy can lead to a decrease in unemployment.

Answer 14

True

Question 15

What is the inflation target set by the Bank of England?

Answer 15

2%.

Question 16

What is a liquidity trap?

Answer 16

A situation where interest rates are low and savings rates are high, rendering monetary policy ineffective.

Question 17

Multiple Choice: Which of the following can be a consequence of excessive monetary easing? A) Hyperinflation B) Economic growth C) Lower unemployment

Answer 17

A) Hyperinflation

Question 18

What is the impact of high-interest rates on consumer spending?

Answer 18

It typically reduces consumer spending.

Question 19

Fill in the blank: The _______ rate is the rate at which the central bank lends to commercial banks.

Answer 19

Base

Question 20

What is the relationship between interest rates and exchange rates?

Answer 20

Higher interest rates tend to attract foreign capital, leading to an appreciation of the currency.

Question 21

True or False: Central banks can only influence nominal interest rates.

Answer 21

False

Question 22

What is the main goal of contractionary monetary policy?

Answer 22

To reduce inflation.

Question 23

Multiple Choice: Which of the following is a limitation of monetary policy? A) Time lags B) Fiscal policy C) Taxation

Answer 23

A) Time lags

Question 24

What does the term ‘crowding out’ refer to in the context of monetary policy?

Answer 24

When government borrowing leads to higher interest rates, which reduces private investment.

Question 25

Fill in the blank: The _______ effect occurs when lower interest rates lead to increased spending and investment.

Answer 25

Wealth

Question 26

What is the primary mechanism through which monetary policy affects the economy?

Answer 26

Through changes in interest rates.

Question 27

True or False: A strong currency can negatively impact exports.

Answer 27

True

Question 28

What is the term for the maximum amount of money that banks are required to hold in reserve?

Answer 28

Reserve requirement.

Question 29

Multiple Choice: Which of the following actions would be considered expansionary? A) Increasing interest rates B) Lowering the reserve requirement C) Selling government bonds

Answer 29

B) Lowering the reserve requirement

Question 30

What effect does monetary policy have on inflation expectations?

Answer 30

It can influence expectations, which in turn affects actual inflation.

Question 31

Fill in the blank: The _______ curve represents the relationship between inflation and unemployment.

Answer 31

Phillips

Question 32

What is the effect of a central bank's forward guidance?

Answer 32

It shapes market expectations about future monetary policy.

Question 33

True or False: Monetary policy can be used to target specific sectors of the economy.

Answer 33

False

Question 34

What does the term 'monetary transmission mechanism' refer to?

Answer 34

The process through which monetary policy decisions affect the economy and inflation.

Question 35

Multiple Choice: Which of the following is a potential risk of low-interest rates? A) Increased borrowing B) Asset bubbles C) Higher savings

Answer 35

B) Asset bubbles

Question 36

Fill in the blank: The _______ is a rate set by the central bank that influences other interest rates in the economy.

Answer 36

Policy rate

Question 37

What is the impact of monetary policy on long-term economic growth?

Answer 37

It can influence growth through investment and consumption decisions.