Monetary Policy Flashcards
7 cards from real CBE practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Monetary Policy flashcards as text
A contractionary monetary policy stance is most appropriate when an economy experiences:
Answer: Overheating with inflation above the central bank's target
Contractionary policy (raising rates, reducing money supply) is used to cool an overheating economy and bring inflation back to target.
The money multiplier in a fractional reserve banking system equals:
Answer: 1 divided by the reserve requirement ratio
The simple money multiplier is 1/r where r is the required reserve ratio; a 10% reserve ratio yields a maximum multiplier of 10.
Which scenario illustrates the 'transmission mechanism' of monetary policy operating through the credit channel?
Answer: Rate cuts reduce bank funding costs, enabling more and cheaper business loans
The credit channel transmits monetary policy through changes in banks' cost of funds and their willingness to extend credit to businesses and households.
The 'interest rate channel' of monetary policy transmission suggests that lower rates stimulate the economy primarily through:
Answer: Higher business investment as the cost of capital falls
Lower interest rates reduce the hurdle rate for investment projects, encouraging firms to borrow and invest in capital goods.
Sterilized foreign exchange intervention differs from unsterilized intervention because sterilization:
Answer: Involves selling domestic bonds to offset the monetary impact of FX purchases
Sterilization offsets the domestic money supply effect of FX operations by simultaneously conducting an open market operation in the opposite direction.
In the context of monetary policy, 'inflation targeting' requires a central bank to:
Answer: Publicly commit to a specific inflation rate and adjust policy to achieve it
Inflation targeting uses a publicly announced inflation goal (e.g., 2%) as the nominal anchor, with policy adjusted to keep actual inflation near that target.
The 'sacrifice ratio' in monetary economics measures:
Answer: The percentage points of GDP lost per percentage point reduction in inflation
The sacrifice ratio captures the output cost of disinflation: how much real GDP must be foregone to reduce inflation by one percentage point.