Understanding Monetary Policy

What happens to interest rates when the money supply increases?

• Interest rates become volatile

• Interest rates remain unchanged

• Interest rates fall

• Interest rates rise

What is the monetary base composed of?

• Only currency in circulation

• Bank reserves and currency in circulation

• Checkable deposits only

• All forms of money including savings

How does a decrease in the reserve requirement affect the money supply?

• It increases the money supply

• It stabilizes the money supply

• It has no effect on the money supply

• It decreases the money supply

What is the discount rate?

• The rate banks charge each other for loans

• The rate the central bank charges banks for loans

• The rate consumers pay for mortgages

• The rate set by commercial banks for savings accounts

How does lowering the discount rate affect banks?

• It discourages banks from borrowing

• It makes borrowing from the central bank more expensive

• It has no effect on bank borrowing

• It makes borrowing from the central bank cheaper

What are open market operations?

• The central bank buying and selling government bonds

• The central bank setting interest rates for loans

• The central bank regulating commercial banks

• The central bank issuing new currency

What happens to the money supply when the central bank buys bonds?

• The money supply becomes unstable

• The money supply increases

• The money supply remains the same

• The money supply decreases

What is the effect of selling bonds on the money supply?

• It decreases the money supply

• It stabilizes the money supply

• It increases the money supply

• It has no effect on the money supply

What is quantitative easing?

• The central bank reducing the money supply

• The central bank increasing interest rates

• The central bank buying various assets including mortgages

• The central bank buying only government bonds

What is the primary goal of monetary policy?

• To increase the national debt

• To control inflation and stabilize the economy

• To reduce government spending

• To increase taxes