CBE Monetary Policy 3

Question 1

A contractionary monetary policy stance is most appropriate when an economy experiences:

Accepted Answer

Overheating with inflation above the central bank's target

Answer

Contractionary policy (raising rates, reducing money supply) is used to cool an overheating economy and bring inflation back to target.

Question 2

The money multiplier in a fractional reserve banking system equals:

Accepted Answer

1 divided by the reserve requirement ratio

Answer

The simple money multiplier is 1/r where r is the required reserve ratio; a 10% reserve ratio yields a maximum multiplier of 10.

Question 3

Which scenario illustrates the 'transmission mechanism' of monetary policy operating through the credit channel?

Accepted Answer

Rate cuts reduce bank funding costs, enabling more and cheaper business loans

Answer

The credit channel transmits monetary policy through changes in banks' cost of funds and their willingness to extend credit to businesses and households.

Question 4

The 'interest rate channel' of monetary policy transmission suggests that lower rates stimulate the economy primarily through:

Accepted Answer

Higher business investment as the cost of capital falls

Answer

Lower interest rates reduce the hurdle rate for investment projects, encouraging firms to borrow and invest in capital goods.

Question 5

Sterilized foreign exchange intervention differs from unsterilized intervention because sterilization:

Accepted Answer

Involves selling domestic bonds to offset the monetary impact of FX purchases

Answer

Sterilization offsets the domestic money supply effect of FX operations by simultaneously conducting an open market operation in the opposite direction.

(CBE) Certified Business Economist Practice Test

(CBE) Certified Business Economist Practice Test

CBE Monetary Policy 3