Monetary and Fiscal Policy Flashcards
7 cards from real CEA 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 and Fiscal Policy flashcards as text
The 'sacrifice ratio' in monetary economics measures:
Answer: The cost in lost output per percentage point reduction in inflation
The sacrifice ratio is the cumulative percentage loss in real GDP (or rise in unemployment) required to reduce inflation by one percentage point.
A steepening yield curve (short rates falling relative to long rates) typically signals:
Answer: Easier monetary conditions and higher expected future growth or inflation
A steepening yield curve usually reflects central bank rate cuts (lowering short rates) combined with market expectations of stronger future growth or higher inflation.
The primary goal of the Federal Reserve's dual mandate is to achieve:
Answer: Maximum employment and stable prices
The Federal Reserve is legally mandated to pursue maximum employment and stable prices (approximately 2% inflation), with no direct mandate for fiscal balance or exchange rates.
Which situation would most likely cause a fiscal multiplier to be larger?
Answer: A closed economy in a deep recession with idle resources
Fiscal multipliers are larger when there is economic slack (idle resources), limited monetary policy offset, and low import leakage, as in a closed recessionary economy.
Central bank 'sterilization' of foreign exchange interventions means:
Answer: Offsetting domestic monetary effects of FX interventions via open market operations
Sterilization involves using open market operations to offset the domestic money supply effect of foreign exchange interventions, keeping monetary conditions unchanged.
The 'debt monetization' concern arises when:
Answer: The central bank permanently buys government debt, expanding the money supply
Debt monetization occurs when the central bank purchases and holds government bonds, effectively financing deficits by printing money and risking inflation.
Under contractionary monetary policy, the transmission mechanism to the real economy primarily works through:
Answer: Higher interest rates reducing investment, housing, and consumer credit spending
Higher policy rates raise borrowing costs throughout the economy, dampening business investment, housing activity, and consumer credit-financed spending.