IEI QUIZ 2

Who is responsible for setting monetary policy in the UK?

• UK Government

• House of Commons
• International Monetary Fund

• Bank of England

Which of the following is NOT a tool of monetary policy?

• Reserve requirements
• Quantitative easing

• Government spending

• Bank rate

What is the main goal of fiscal policy?

• Stabilize currency exchange rates

• To eliminate inflation and control interest rates.
• To promote international trade and investment.
• To influence economic activity and achieve economic objectives.

Which of the following is a fiscal policy tool?

• Discount rate

• Reserve requirements

• Taxation

• Open market operations

How does quantitative easing aim to stimulate the economy?

• By reducing reserve requirements for banks

• By purchasing government securities to increase money supply

• By lowering taxes

• By increasing government spending

Why don’t banks hold 100% reserves?

• Banks hold a fraction of deposits as reserves to lend out the rest, facilitating credit creation and economic growth.
• Because it increases their reserve ratio.

• Banks are required by law to hold all deposits as reserves.
• Banks need to keep all deposits as cash for security reasons.

If the central bank wants to decrease the money supply, what action might it take?

• Lower interest rates
• Buy government securities
• Increase government spending
• Increase reserve requirements or sell government securities.

What happens when the central bank raises interest rates?

• Raising interest rates typically slows down economic growth and helps control inflation.
• Higher interest rates lead to lower unemployment rates and increased job creation.
• Increasing interest rates has no effect on inflation or economic activity.

• Borrowing becomes cheaper

What is a Pareto improvement?

• A change that increases efficiency in the economy

• A situation where an allocation change benefits at least one party without harming others.
• An allocation change that benefits everyone involved equally.
• A policy that stabilizes inflation

What is the effect of lowering reserve requirements on the banking system?

• It has no impact on the banking system or the economy.

• It decreases the money supply and slows down economic growth.

• It increases the amount of money banks can lend, potentially boosting economic activity.

• It forces banks to hold more cash, reducing their ability to lend.