CEA Monetary and Fiscal Policy 5

Question 1

The 'time inconsistency' problem in monetary policy refers to:

Accepted Answer

The incentive for central banks to renege on low-inflation commitments to boost output

Answer

Time inconsistency describes how a central bank that committed to low inflation may later find it optimal to allow higher inflation to reduce unemployment, undermining credibility.

Question 2

Which of the following best defines 'seigniorage'?

Accepted Answer

Revenue the government earns from issuing currency at low production cost

Answer

Seigniorage is the profit the government earns by issuing currency whose face value exceeds its production cost, effectively a revenue source from money creation.

Question 3

In the IS-LM framework, expansionary fiscal policy in a liquidity trap has:

Accepted Answer

Maximum effect because monetary policy cannot crowd out fiscal stimulus

Answer

In a liquidity trap the LM curve is flat, so IS curve shifts from fiscal expansion raise output without raising interest rates, eliminating crowding out.

Question 4

Which metric best captures whether fiscal policy is expansionary or contractionary independent of automatic stabilizers?

Accepted Answer

The cyclically adjusted (structural) budget deficit

Answer

The cyclically adjusted deficit removes automatic stabilizer effects, isolating discretionary fiscal policy changes that reflect active government policy choices.

Question 5

The 'portfolio balance channel' of QE suggests that asset purchases stimulate the economy by:

Accepted Answer

Pushing investors into riskier assets by reducing returns on safe assets purchased

Answer

By purchasing safe assets like Treasuries, QE reduces their yields and induces investors to rebalance into riskier assets like corporate bonds and equities, easing financial conditions.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Monetary and Fiscal Policy 5