Monetary Policy

Question 1

When a central bank announces a decrease in its official policy rate, the desired impact is an increase in:
A. investment.
B. interbank borrowing rates.
C. the national currency’s value in exchange for other currencies.

Answer 1

A. investment.

Question 2

Which action is a central bank least likely to take if it wants to encourage businesses and households to borrow for investment and consumption purposes?
A. Sell long-dated government securities
B. Purchase long-dated government treasuries
C. Purchase mortgage bonds or other securities

Answer 2

A. Sell long-dated government securities

Question 3

A central bank’s repeated open market purchases of government bonds:
A. decreases the money supply.
B. is prohibited in most countries.
C. is consistent with an expansionary monetary policy.

Answer 3

C. is consistent with an expansionary monetary policy.

Question 4

A prolonged period of an official interest rate very close to zero without an increase in economic growth most likely suggests:
A. quantitative easing must be limited to be successful.
B. the effectiveness of monetary policy may be limited.
C. targeting reserve levels is more important than targeting interest rates.

Answer 4

B. the effectiveness of monetary policy may be limited.

Question 5

Raising the reserve requirement is most likely an example of which type of monetary policy?
A. Neutral
B. Expansionary
C. Contractionary

Answer 5

C. Contractionary

Question 6

Which of the following is a limitation on the ability of central banks to stimulate growth in periods of deflation?
A. Ricardian equivalence
B. Interaction of monetary and fiscal policy
C. Interest rates cannot fall significantly below zero

Answer 6

C. Interest rates cannot fall significantly below zero

Question 7

The least likely limitation to the effectiveness of monetary policy is that central banks cannot:
A. accurately determine the neutral rate of interest.
B. regulate the willingness of financial institutions to lend
C. control amounts that economic agents deposit into banks

Answer 7

A. accurately determine the neutral rate of interest.

Question 8

Quantitative easing, the purchase of government or private securities by the central banks from individuals or institutions, is an example of which monetary policy stance?
A. neutral
B. expansionary
C. contractionary

Answer 8

B. expansionary