Monetary Policy Question Bank and Explanations for some

What is inflation targeting? A. Committing the central bank to achieve an announced level of inflation B. Another name for contractionary monetary policy C. A policy that attempts to reduce inflation to zero D. A target that links the central bank's target for the overnight rate of inflation

A. Committing the central bank to achieve an announced level of inflation Inflation targeting - conducting monetary policy so as to commit the central bank to achieving a publicly announced level of inflation Arguments in favour 1. rGDP returns to potential level 2. Households and firms have accurate expectations of future price level 3. Institutionalized country's monetary policy 4. Promote accountability of the part of the Central Bank Arguments against 1. Reduced flexibility of monetary policy 2. Assumes the Central Bank can accurately forecast inflation 3. Accountability for inflation reduces the likelihood that it would achieve other policy goals

What do economists mean by the demand for money? A. It is the amount of money-currency and checking account deposits-that individuals hold. B. It is the amount of​ currency, checking account deposits and stocks and bonds that individuals hold. C. It is the amount of money-currency and checking account deposits-that individuals use to pay for one transaction per day. D. It is the monetary value of total wealth of individuals.

A. It is the amount of money-currency and checking account deposits-that individuals hold.

What is the advantage of holding money? A. Money can be used to buy​ goods, services, or financial assets. B. Money held by an individual can be used to measure​ one's wealth. C. An individual pays little or no taxes on the amount of money he holds. D. Currency and checking account deposits held by individuals earn substantial interest income.

A. Money can be used to buy​ goods, services, or financial assets.

Which one of the following is not one of the monetary policy goals of the central bank? A. Reduce income inequality B. Maintain stability of financial markets and institutions C. Maintain high unemployment D. Maintain price level

A. Reduce income inequality

If the central bank believes the economy is about to fall into a recession, it should A. use an expansionary monetary policy to lower the interest rate and shift AD to the right. B. use a contractionary monetary policy to lower the interest rate and shift AD to the left. C. use its judgment to do nothing and let the economy make the self adjustment back to potential GDP. D. use an expansionary fiscal policy to increase the interest rate and shift AD to the right.

A. use an expansionary monetary policy to lower the interest rate and shift AD to the right.

What is the disadvantage of holding money? A. ​Money, in the form of currency or checking account​ deposits, earns either no interest or a very low rate of interest. B. Money can be easily stolen or lost. C. Money is not very​ "liquid." D. Money cannot be readily used to buy financial assets.

A. ​Money, in the form of currency or checking account​ deposits, earns either no interest or a very low rate of interest.

The central bank uses policy targets of interest rate and/or money supply because: A. It is difficult to set a target for the unemployment​ rate, which constantly fluctuates. B. It can affect the interest rate and the money supply directly and these in turn can affect​ unemployment, GDP​ growth, and the price level C. The inflation rate is controlled by the Government D. The target for the GDP growth rate is set by the Government.

B. It can affect the interest rate and the money supply directly and these in turn can affect​ unemployment, GDP​ growth, and the price level The Central Bank uses policy targets because it cannot affect its policy goals directly, but must affect the goals indirectly through its policy targets.

What is the difference between the central bank and commercial banks? A. The central bank is responsible for monetary policy and provides commercial services as well B. The central bank is responsible for monetary policy and does not provide commercial service C. The central bank sets objectives of monetary policy and serves the public with loans. D. The central bank is a union of all commercial banks in a country and is responsible for monetary policy.

B. The central bank is responsible for monetary policy and does not provide commercial service

What is the overnight interest​ rate? A. the required reserve ratio that the Central Bank requires banks to maintain. B. the interest rate that banks charge each other for overnight loans. C. the interest rate that the Central Bank charges for its loans to banks. D. the interest rate that the banks charge for loans to its important commercial borrowers.

B. the interest rate that banks charge each other for overnight loans.

As the interest rate increases, A. consumption, investment, and net exports​ increase, and aggregate demand increases. B. ​consumption, investment, and net exports​ decrease; aggregate demand decreases. C. ​consumption, investment, and net exports fall but government spending​ increases, and aggregate demand increases. D. consumption increases but investment and net exports​ decrease; aggregate demand remains unchanged.

B. ​consumption, investment, and net exports​ decrease; aggregate demand decreases. As the interest rate increases, each component of AD, such as consumption, investment, and net exports, decreases because these are interest-sensitive spending components and AD decreases as shown by the shift of the AD curve to the left.

If the Central Bank believes the inflation rate is about to​ increase, it should A. use a contractionary fiscal policy to increase the interest rate and shift AD to the left. B. use an expansionary monetary policy to lower the interest rate and shift AD to the right. C. use a contractionary monetary policy to increase the interest rate and shift AD to the left. D. use a combination of tax increases and spending cuts to keep the budget balanced.

C. use a contractionary monetary policy to increase the interest rate and shift AD to the left.

What role doe the overnight interest rate play in monetary policy? The overnight interest rate is: A. very important for the Central Bank's monetary policy because it is administratively set by the Central Bank. B. very important for the Central Bank's monetary policy because individual borrowers pay this interest rate for mortgage loans. C. very important for the Central Bank's monetary policy because the Central Bank uses the federal funds rate as a monetary policy target since it can control the rate through open market operations. D. not important for the Central Bank's monetary policy since households and firms are not directly affected by any adjustment of this rate.

C. very important for the Central Bank's monetary policy because the Central Bank uses the federal funds rate as a monetary policy target since it can control the rate through open market operations. The overnight interest rate is very important for the Central Bank's monetary policy because it is the interest rate that the Central Bank targets for monetary policy

What could cause a shift right of the money demanded curve? A. Decrease in real GDP or decrease in the price level B. Increase in real GDP or decrease in the price level C. Decrease in real GDP or increase in the price level D. Increase in real GDP or increase in the price level

D. Increase in real GDP or increase in the price level Changes in rGDP or the price level causes the money demand curve to shift. An increase in rGDP or price level shifts the MD curve rightward. An increase in rGDP means that the amount of buying and selling will increase. The increase in buying/selling increases the demand for money as a medium exchange. Households and firms hold more money at all interest rates and the MD curve shifts right A higher price level increase the amount of money required for a given amount of buying and selling, Again households and firms hold more money at all interest rates and the MD curve shifts right.

A monetary policy target used by the Central Bank is A. unemployment rate B. budget deficit C. growth rate of GDP D. interest rate

D. interest rate A monetary policy target is a variable that the Central Bank can affect directly and that in turn affects variables that are closely related to the Central Bank's policy gals, such as low unemployment and low inflations. The money supply and the interest rate are the two main policy targets of the Central Bank.

What happens to opportunity cost of holding money if quantity of money demanded decreases, interest rate decreases, quantity of money increases?

The opportunity cost of holding money decreases When the interest rates on financial assets are low, the opportunity cost of holding money is low, so the quantity demanded by households and firms will be high. When the interest rates on financial assets are high, the opportunity cost of holding money is high, so the quantity of money demanded by households and firms will be low. Therefore the money demanded curve slopes downward. Lower interest rates cause firms and households to switch from financial assets to money.

If the central bank sells $XXX worth of bonds to the public, the money supply will _ since purchasers of these securities will ____ which _ banks' reserves and causes banks to typically loan _

decrease, withdraw funds from banks, decreases, less If the Central Bank sells $XXX worth of bonds to the public, the money supply will decrease since the purchasers of these securities will withdraw finds they require to purchase the bonds from banks, which decreases banks' reserves. In a fractional reserve banking system, which nearly all countries employ, banks keep less than 100% of deposits as reserves. Then people deposit money in a bank, the bank loans most of the money to someone else. Therefore, then banks' reserves decrease. banks typically loan out less. Therefore, when banks' reserves decrease, banks typically loan out less. When banks loan out less, chequing account balances are lower than when banks loan out more. Therefore money supply will decrease.

Consider the following​ statement: ​"The Central Bank has an easy job. Say it wants to increase real GDP by​ $200 billion. All it has to do is increase the money supply by that​ amount." The statement is _ because an increase in the money supply __ affect real GDP directly.

incorrect, does not

An increase in interest rates affects aggregate demand by A. shifting the aggregate demand curve to the​ right, increasing real GDP and lowering the price level. B. shifting the aggregate demand curve to the​ left, reducing real GDP and lowering the price level. C. shifting the aggregate supply curve to the​ left, decreasing real GDP and increasing the price level. D. shifting the aggregate supply curve to the​ right, increasing real GDP and lowering the price level.

B. shifting the aggregate demand curve to the​ left, reducing real GDP and lowering the price level.