Understanding Monetary Policy Tools

What are the two main types of monetary policy?

• Fiscal and regulatory monetary policy

• Expansionary and contractionary monetary policy

• Inflationary and deflationary monetary policy

• Short-term and long-term monetary policy

How does quantitative easing affect interest rates?

• Quantitative easing lowers interest rates.

• Quantitative easing stabilizes interest rates.

• Quantitative easing raises interest rates.

• Quantitative easing has no effect on interest rates.

What is the primary goal of open market operations?

• To stabilize stock market prices.

• To regulate the money supply and influence interest rates.

• To increase government revenue through taxation.

• To promote international trade agreements.

Identify one potential risk of quantitative easing.

• Lower inflation rates causing deflation.

• Increased unemployment rates due to higher interest rates.

• Stronger currency value leading to trade deficits.

• Asset bubbles due to excessive risk-taking.

How does the central bank implement open market operations?

• The central bank implements open market operations by regulating foreign exchange rates.

• The central bank implements open market operations by adjusting interest rates.

• The central bank implements open market operations by buying or selling government securities.

• The central bank implements open market operations by controlling inflation directly.

What is the difference between expansionary and contractionary monetary policy?

• Expansionary policy has no effect on interest rates; contractionary policy only affects government spending.

• Both policies increase money supply but differ in their effects on inflation.

• Expansionary policy decreases money supply and raises interest rates; contractionary policy increases money supply and lowers interest rates.

• Expansionary policy increases money supply and lowers interest rates; contractionary policy decreases money supply and raises interest rates.

Discuss how quantitative easing can impact inflation rates.

• Quantitative easing only affects interest rates, not inflation.

• Quantitative easing can lead to higher inflation rates by increasing the money supply and stimulating demand.

• Quantitative easing reduces the money supply, leading to lower inflation rates.

• Quantitative easing has no effect on inflation rates whatsoever.

What role do government securities play in open market operations?

• Government securities are used to increase taxes during open market operations.

• Government securities are used to control the money supply in open market operations.

• Government securities are issued to fund government employee salaries.

• Government securities are primarily used for international trade agreements.

How can open market operations influence the money supply?

• The money supply is influenced solely by government spending, not open market operations.

• Open market operations can only decrease the money supply by buying securities.

• Open market operations only affect interest rates, not the money supply.

• Open market operations influence the money supply by either increasing it through the purchase of securities or decreasing it through the sale of securities.

What are the long-term effects of sustained quantitative easing on the economy?

• Long-term effects include increased asset prices, inflationary pressures, income inequality, and financial market distortions.

• Increased government debt

• Lower interest rates

• Decreased consumer spending