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
Which of the following best describes the 'liquidity trap' scenario in monetary policy?
Answer: Nominal interest rates are near zero and monetary policy loses effectiveness
A liquidity trap occurs when nominal interest rates are near zero, making conventional monetary policy ineffective because people hoard cash instead of spending or investing.
The Taylor Rule is primarily used by central banks to:
Answer: Determine appropriate interest rates based on inflation and output gaps
The Taylor Rule provides a formula linking the federal funds rate to inflation deviations from target and the output gap, guiding central bank interest rate decisions.
When the government increases spending without raising taxes during a recession, this is an example of:
Answer: Expansionary fiscal policy
Deficit-financed government spending increases aggregate demand without the offsetting drag of higher taxes, making it expansionary fiscal policy.
The 'crowding out' effect in fiscal policy refers to:
Answer: Higher government spending reducing private investment via rising interest rates
Crowding out occurs when government borrowing pushes up interest rates, which discourages private sector investment and partially offsets the fiscal stimulus.
Which open market operation would the Fed use to tighten monetary conditions?
Answer: Selling Treasury securities to commercial banks
Selling Treasury securities withdraws reserves from the banking system, reducing the money supply and tightening monetary conditions.
A balanced budget multiplier of 1 implies that:
Answer: Equal increases in taxes and spending raise GDP by the amount of spending increase
The balanced budget multiplier equals 1, meaning an equal increase in government spending and taxes raises GDP by exactly the amount of the spending increase.
In the context of monetary policy, 'forward guidance' refers to:
Answer: Central bank communication about its expected future policy path
Forward guidance is a tool where the central bank signals its future policy intentions to influence current economic expectations and financial conditions.