Bank of England Monetary Policy Quiz

Which one of the following is not part of the role of the Monetary Policy Committee of the Bank of England?

• Achieving the target rate of inflation

• Changing Bank Rate

• Reviewing various pieces of macroeconomic data

• Setting the target rate for inflation

A central bank has raised interest rates as part of monetary policy. Which one of the following policy objectives is this most likely to assist the government in achieving?

• A more equitable distribution of income

• Bringing down the rate of inflation

• Increasing the rate of economic growth

• Minimising the rate of unemployment

An economy has a positive output gap and the government decides to increase interest rates. Which one of the following outcomes is most likely to result from the higher interest rates?

• Investment: Decrease, Output gap: Decrease, Savings: Increase

• Investment: Decrease, Output gap: Increase, Savings: Decrease

• Investment: Increase, Output gap: Decrease, Savings: Decrease

• Investment: Increase, Output gap: Increase, Savings: Increase

The Bank of England decides to raise interest rates to bring inflation back to its target rate. This policy is less likely to be effective if at the same time:

• firms' profits and investment fall

• income tax rates are reduced

• labour productivity grows more quickly

• other countries reduce their demand for UK exports

The Bank of England’s Monetary Policy Committee increases Bank Rate to reduce the risk of an increase in inflationary pressure in the economy. All other things being equal, which one of the following is most likely to result from the policy change?

• Consumption will increase since house prices will rise and increase wealth

• Investment will increase as the return on investment projects rises

• Savings will increase as interest rates rise in real terms

• The exchange rate will fall as a result of increased capital inflows

The graph shows an economy's aggregate demand (AD) and short-run aggregate supply (SRAS) curves. The initial equilibrium price level is at OP1. Which one of the following is most likely to be responsible for both the cost-push and demand-pull inflationary pressures that raise the price level to OP2?

• A fall in interest rates

• A fall in the exchange rate

• A rise in direct taxes

• A rise in indirect taxes

All other things being equal, in which one of the following circumstances is the Bank of England most likely to raise Bank Rate to maintain financial stability?

• A fall in bank liquidity and capital ratios following several years of rapid growth in bank lending and a boom in house prices

• An increase in the government's target for the rate of inflation following a significant increase in the rate of productivity growth

• An increase in the savings ratio as the economy recovers from a recession

• A rise in share prices on global stock markets due to the growth in world trade

The table below shows four possible sets of circumstances for the UK economy. Which set of circumstances is most likely to cause the Monetary Policy Committee of the Bank of England to raise bank rate?

• Negative output gap, falling exchange rate

• Negative output gap, rising exchange rate

• Positive output gap, falling exchange rate

• Positive output gap, rising exchange rate

An economy is in recession with price deflation and rising unemployment. All other things being equal, which one of the following combination of policies would be most appropriate in these circumstances?

• Low interest rates, a higher budget deficit, and a depreciation of the pound

• Low interest rates, expansion of the money supply, and an appreciation of the pound

• Higher government spending, higher taxes, and a contraction of the money supply

• Higher government spending, higher interest rates, and an appreciation of the pound

Which one of the following is a correct statement about monetary policy in the UK?

• Monetary policy does not affect the supply side of the economy

• When the government uses contractionary fiscal policy, the Bank of England will use expansionary monetary policy to offset the effects

• Lower interest rates may reduce deflationary pressure but they may also reduce savings

• Monetary policy may involve the expansion of the money supply to reduce aggregate demand