CEA Monetary and Fiscal Policy 4

Question 1

The 'sacrifice ratio' in monetary economics measures:

Accepted Answer

The cost in lost output per percentage point reduction in inflation

Answer

The sacrifice ratio is the cumulative percentage loss in real GDP (or rise in unemployment) required to reduce inflation by one percentage point.

Question 2

A steepening yield curve (short rates falling relative to long rates) typically signals:

Accepted Answer

Easier monetary conditions and higher expected future growth or inflation

Answer

A steepening yield curve usually reflects central bank rate cuts (lowering short rates) combined with market expectations of stronger future growth or higher inflation.

Question 3

The primary goal of the Federal Reserve's dual mandate is to achieve:

Accepted Answer

Maximum employment and stable prices

Answer

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.

Question 4

Which situation would most likely cause a fiscal multiplier to be larger?

Accepted Answer

A closed economy in a deep recession with idle resources

Answer

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.

Question 5

Central bank 'sterilization' of foreign exchange interventions means:

Accepted Answer

Offsetting domestic monetary effects of FX interventions via open market operations

Answer

Sterilization involves using open market operations to offset the domestic money supply effect of foreign exchange interventions, keeping monetary conditions unchanged.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Monetary and Fiscal Policy 4