Monetary Policy and its Effects Quiz

Central banks use interest rates as a tool to implement monetary policy by influencing borrowing costs and economic activity.

The primary objective of monetary policy is to minimize inflation and maintain price stability in the economy.

The ratio of reserves that banks are required to hold against deposits is known as the reserve requirement.

The rate at which one currency can be exchanged for another in the foreign exchange market is known as the exchange rate.

Buying government securities in open market operations is an expansionary monetary policy tool, increasing money supply and stimulating economic growth.

The interest rate at which the central bank lends money to commercial banks is known as the discount rate.

The purchase and sale of government securities by the central bank to influence the money supply is known as open market operations.

A potential disadvantage of expansionary monetary policy is the risk of inflation due to increased money supply and economic stimulation.

Contractionary monetary policy decreases aggregate demand by raising interest rates and reducing borrowing, slowing economic activity.

When interest rates rise, bond prices fall as existing bonds with lower interest rates become less attractive.

The process of gradually raising interest rates to prevent inflation is known as tightening monetary policy.

Buying long-term securities is a tool used in quantitative easing, aiming to lower long-term interest rates and stimulate economic activity.