CEA Monetary and Fiscal Policy 3

Question 1

The money multiplier in a fractional reserve banking system is calculated as:

Accepted Answer

1 divided by the reserve ratio

Answer

The simple money multiplier equals 1/reserve ratio, showing how much the money supply can expand for each dollar of base money injected into the banking system.

Question 2

Which fiscal policy tool is considered an automatic stabilizer?

Accepted Answer

Progressive income taxes and unemployment insurance

Answer

Progressive income taxes and unemployment insurance automatically shrink during expansions and expand during recessions without legislative action, stabilizing the economy.

Question 3

Quantitative easing (QE) differs from traditional monetary policy primarily because it:

Accepted Answer

Involves purchasing longer-term assets to inject liquidity beyond the zero lower bound

Answer

QE involves large-scale purchases of longer-term securities to lower long-term rates and inject liquidity when conventional rate cuts are constrained by the zero lower bound.

Question 4

Under a fixed exchange rate regime, a country's monetary policy is most constrained because:

Accepted Answer

The central bank must prioritize exchange rate stability over domestic goals

Answer

With a fixed exchange rate, the central bank must adjust monetary policy to maintain the peg, sacrificing independence over domestic objectives like inflation or employment.

Question 5

Which scenario best illustrates 'fiscal dominance'?

Accepted Answer

Government borrowing needs force the central bank to monetize deficits

Answer

Fiscal dominance occurs when large government deficits pressure the central bank to create money to finance debt, undermining its anti-inflation mandate.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Monetary and Fiscal Policy 3