Monetary Policy Quiz (Based on PPT studied)

What is the primary goal of monetary policy?

• Maximizing government revenue

• Achieving full employment

• Controlling inflation and maintaining price stability

• Encouraging international trade

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

• Increase in investment, increase in output gap, increase in savings

• Increase in investment, decrease in output gap, decrease in savings

• Decrease in investment, increase in output gap, decrease in savings

• Decrease in investment, decrease in output gap, increase in savings

A government wanting to use monetary policy to reduce deflation could decrease the

• Exchange rate

• Minimum wage

• Rate of indirect tax

• Money supply

The Bank of England’s Monetary Policy Committee increases the Base 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?

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

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

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

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

Many firms use profits to finance their capital investment instead of borrowing from banks. For these firms, higher interest rates are most likely to

• Cause them to reduce their investment as they can now earn more interest from saving their profits.

• Cause them to change the type of investment made with more investment in buildings.

• Result in more investment as they can earn more interest on money deposited in banks.

• Have no impact on the amount of investment undertaken as they pay no interest.

The Monetary Policy Committee of the Bank of England has to assess inflationary pressures when deciding on the level of the Base Rate. Which one of the following pieces of information is most likely to persuade the Committee to raise the Base Rate?

• Surveys showing that many firms have spare capacity

• GDP growth below the trend rate in the previous two quarters

• A fall in the number of job vacancies advertised

• Statistics showing an increase in bank lending to households

When the Bank of England raises interest rates, how does it typically impact the UK housing market?

• It encourages higher home prices and increased demand for housing.

• It only affects the rental market, not the sale of homes.

• It discourages borrowing and may lead to a decrease in home sales and prices.

• It has no significant effect on the housing market.

In response to rising interest rates, what is one strategy that homeowners in the UK may consider to mitigate the impact on their mortgage payments?

• Reducing the size of their mortgage down payment (deposit)

• Taking on additional consumer debt to cover mortgage costs.

• Increasing their home's selling price.

• Refinancing their mortgages to lock in lower rates.

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

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

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

Which one of the following combinations is correct regarding the rate of inflation and the responsibilities of the UK Government and the Monetary Policy Committee (MPC) of the Bank of England?

• Inflation target set by Government, Interest rate set by MPC

• Inflation target set by MPC, Interest rate set by Government

• Inflation target set by Government, Interest rate set by Government

• Inflation target set by MPC, Interest rate set by MPC