#1
Which of the following is NOT a tool used by central banks for monetary policy?
Fiscal policy
ExplanationFiscal policy is managed by governments, not central banks, and involves taxation and government spending.
#2
What is the primary function of commercial banks in relation to monetary policy?
To implement monetary policy
ExplanationCommercial banks execute the policies set by central banks, such as managing reserves and lending rates.
#3
Which of the following is a potential consequence of loose monetary policy?
Increased borrowing and spending
ExplanationLoose monetary policy encourages borrowing and spending by lowering interest rates and increasing liquidity.
#4
What is the primary objective of contractionary monetary policy?
Control inflation
ExplanationContractionary monetary policy aims to reduce inflationary pressures by decreasing the money supply.
#5
What is the Phillips Curve relationship in the context of monetary policy?
There is a trade-off between inflation and unemployment
ExplanationThe Phillips Curve suggests a negative correlation between inflation and unemployment levels.
#6
What is the purpose of quantitative easing as a monetary policy tool?
To stimulate economic growth
ExplanationQuantitative easing involves purchasing financial assets to increase liquidity and stimulate economic activity.
#7
In the context of monetary policy, what does 'tightening' refer to?
Decreasing the money supply
ExplanationTightening monetary policy involves reducing the money supply to control inflation and stabilize the economy.
#8
How does an increase in bank credit affect the economy during an economic downturn?
It mitigates the downturn by increasing liquidity
ExplanationIncreased bank credit injects liquidity into the economy, helping to offset the effects of a downturn.
#9
What role does the central bank play in influencing interest rates?
It indirectly influences interest rates through monetary policy
ExplanationCentral banks adjust monetary policy to indirectly influence interest rates, impacting borrowing and spending.
#10
What is the primary objective of open market operations conducted by central banks?
To influence interest rates and the money supply
ExplanationOpen market operations involve buying and selling securities to adjust interest rates and control the money supply.
#11
What is the role of the Federal Reserve in the implementation of monetary policy in the United States?
It conducts open market operations and sets interest rates
ExplanationThe Federal Reserve manages monetary policy through open market operations, setting interest rates, and other tools.
#12
What is the effect of a decrease in the discount rate by the central bank?
It encourages borrowing and spending
ExplanationLowering the discount rate incentivizes borrowing, which stimulates spending and economic activity.
#13
What is the 'money multiplier' in the context of banking and monetary policy?
The ratio by which deposits create additional money in the economy
ExplanationThe money multiplier represents how much the money supply expands with each initial deposit.
#14
How does the central bank use reserve requirements as a monetary policy tool?
To control the money supply
ExplanationAdjusting reserve requirements impacts the amount of money banks can lend, thus affecting the money supply.
#15
How does the central bank control the federal funds rate?
By buying and selling government bonds in the open market
ExplanationThe central bank adjusts the federal funds rate by buying and selling government bonds, influencing liquidity.
#16
How does the central bank intervene in currency markets to influence exchange rates?
By buying or selling its own currency
ExplanationCentral banks intervene in currency markets by buying or selling their own currency to influence exchange rates.
#17
What is the primary objective of forward guidance as a monetary policy tool?
To provide guidance on future interest rate policies
ExplanationForward guidance aims to shape market expectations regarding future interest rate decisions.