Practice Test Geeks(CBE) Certified Business Economist Practice Test
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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.

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  1. Which monetary aggregate includes currency in circulation, demand deposits, and other checkable deposits?

    Answer: M1

    M1 is the narrow money supply, encompassing the most liquid assets: physical currency, demand deposits, and other checkable deposits.

  2. The 'Volcker Shock' of 1979–1982 is historically significant because it demonstrated that:

    Answer: Aggressive monetary tightening can reduce inflation at the cost of a sharp recession

    Fed Chair Volcker raised the fed funds rate above 20%, successfully breaking double-digit inflation but triggering a severe recession with unemployment exceeding 10%.

  3. A central bank is considered 'independent' primarily to:

    Answer: Insulate monetary policy decisions from short-term political pressures

    Central bank independence helps ensure that monetary policy focuses on long-run price stability rather than electoral cycles or short-term political objectives.

  4. In a currency board arrangement, the domestic money supply is:

    Answer: Fully backed by and tied to foreign reserve holdings

    A currency board fixes the exchange rate and requires 100% foreign reserve backing of the domestic monetary base, eliminating discretionary monetary policy.

  5. The 'repo rate' (repurchase agreement rate) is relevant to monetary policy because:

    Answer: It is a key short-term rate through which central bank policy influences money markets

    Repo markets are central to short-term liquidity management, and many central banks (including the Fed) use repo operations to keep overnight rates near their target.

  6. According to the Quantity Theory of Money (MV = PQ), if money supply grows 5% and velocity is stable, a 2% increase in real output implies inflation of approximately:

    Answer: 3%

    With MV = PQ and stable V, %ΔM = %ΔP + %ΔQ; therefore 5% = %ΔP + 2%, giving inflation of approximately 3%.

  7. The 'lender of last resort' function of a central bank is designed primarily to:

    Answer: Provide emergency liquidity to solvent but illiquid financial institutions

    Following Bagehot's principle, the lender of last resort lends freely to solvent institutions against good collateral at a penalty rate to prevent bank runs from becoming crises.