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
Which of the following is an example of an 'automatic stabilizer' that complements monetary policy?
Answer: Progressive income taxes that reduce tax burdens during downturns
Progressive taxes automatically reduce households' tax burdens in recessions (and increase them in booms), stabilizing income without requiring new legislation.
The Federal Reserve's dual mandate requires it to pursue:
Answer: Maximum employment and stable prices
The Fed's dual mandate, established by the Federal Reserve Reform Act of 1977, directs it to promote maximum employment and stable prices.
When the yield curve inverts (short-term rates exceed long-term rates), it typically signals:
Answer: Market expectations of future rate cuts and possible recession
Yield curve inversion reflects market expectations that the Fed will cut short-term rates in the future, often in response to a weakening economy or recession.
Excess reserves held by commercial banks at the Federal Reserve earn interest at which rate?
Answer: The interest on reserve balances (IORB) rate
Since 2008, the Fed has paid interest on reserve balances (IORB), giving it an additional tool to control the effective federal funds rate.
The 'Fisher Effect' in monetary economics states that:
Answer: Nominal interest rates adjust one-for-one with expected inflation
The Fisher Effect holds that nominal rates equal real rates plus expected inflation, so persistently higher inflation expectations raise nominal borrowing costs.
A 'hawkish' central banker is most likely to advocate for:
Answer: Higher interest rates and tighter money supply to control inflation
Hawkish policymakers prioritize price stability and are willing to accept higher unemployment to prevent inflation from becoming entrenched.
The 'neutrality of money' proposition implies that, in the long run, an increase in the money supply will:
Answer: Raise only the price level without affecting real variables
Long-run monetary neutrality holds that changes in the money supply affect only nominal variables (prices, nominal wages) and not real output or employment.