Monetary Policy Quiz

The table shows possible sequences between the rate of interest and other economic variables. Which sequence is the most likely?

• A. higher interest rate, higher borrowing, lower investment, lower GDP

• B. decrease interest rate, increase borrowing, decrease investment, increase GDP

• C. increase interest rate, decrease borrowing, decrease investment, increase GDP

• D. decrease interest rate, decrease borrowing, increase investment, increase GDP

How does a central bank use quantitative easing as part of its monetary policy?

• A. By decreasing the money supply through open market sales

• B. By raising interest rates to control inflation

• C. By purchasing financial assets to increase the money supply

• D. By reducing government spending to stimulate the economy

Which statement about interest rate changes is accurate?

• A. A fall in interest rates will always increase inflation.

• B. A rise in interest rates may increase cost-push inflation.

• C. A rise in interest rates will raise the level of investment in a country.

• D. Interest rate changes have no impact on the level of production.

What is the most likely effect of a government reducing the money supply?

• Growth will increase

• Employment will decrease

• Inflation will increase

• Tax rates will decrease

What is likely to assist the government's policy of reducing inflation?

• allowing businesses to borrow money for longer periods

• encouraging the public to spend more money

• increasing lending to the members of the public

• raising the interest rate on credit card's borrowing

Which of the following is not a strength of the monetary policy?

• The central bank is independent of the government.

• It only considers a short term outlook.

• It targets inflation and maintains stable prices.

• Depreciating the currency can increase exports.