monetary policy

Question 1

What is monetary policy?

Answer 1

Monetary policy refers to the management of the money supply and interest rates by a country’s central bank to control inflation, stabilize the currency, and ensure a stable economy.

Question 2

What are the primary goals of monetary policy?

Answer 2

• Price Stability (Control Inflation)
• Economic Growth
• Full Employment
• Exchange Rate Stability

Question 3

What is the definition of expansionary monetary policy?

Answer 3

Expansionary monetary policy aims to increase the money supply, lower interest rates, and stimulate economic activity.

Question 4

What is the definition of contractionary monetary policy?

Answer 4

Contractionary monetary policy aims to reduce inflation by decreasing the money supply and increasing interest rates.

Question 5

What are the key tools of monetary policy?

Answer 5

• Interest Rates
• Quantitative Easing (QE)
• Open Market Operations
• Reserve Requirements

Question 6

How do interest rates influence borrowing behavior?

Answer 6

Lower interest rates make borrowing cheaper and encourage consumer spending and business investment; higher interest rates make borrowing more expensive.

Question 7

What is quantitative easing (QE)?

Answer 7

QE is a policy tool where the central bank buys financial assets to increase the money supply and lower long-term interest rates.

Question 8

What are open market operations?

Answer 8

Open market operations involve the buying and selling of government bonds to influence the level of money circulating in the economy.

Question 9

What is the impact of expansionary monetary policy on businesses?

Answer 9

Lower interest rates lead to cheaper loans, encouraging increased investment, expansion, and hiring.

Question 10

What is the impact of contractionary monetary policy on consumers?

Answer 10

Higher interest rates reduce disposable income and lower consumer spending.

Question 11

What is the primary objective of controlling inflation?

Answer 11

To keep inflation at a stable, low level, usually around 2%, to protect purchasing power and promote economic stability.

Question 12

What is the transmission mechanism in monetary policy?

Answer 12

The transmission mechanism is the process through which changes in monetary policy affect the economy, including consumer spending, business investment, currency exchange rates, and asset prices.

Question 13

What are the strengths of monetary policy?

Answer 13

• Quick implementation
• Affects the whole economy
• Effective in controlling inflation

Question 14

What are the limitations of monetary policy?

Answer 14

• Time lag in effects
• Ineffectiveness in a liquidity trap
• Distributional effects on different sectors

Question 15

True or False: Lower interest rates can lead to a weaker currency.

Answer 15

True

Question 16

Fill in the blank: The central bank uses _______ to influence borrowing and lending behavior.

Answer 16

[interest rates]

Question 17

What is the role of inflation targeting in monetary policy?

Answer 17

Inflation targeting helps manage inflation expectations by setting a target for inflation and adjusting monetary policy to maintain that target.

Question 18

How does monetary policy affect consumer demand?

Answer 18

Lower interest rates encourage consumers to spend more, while higher rates reduce consumer spending.

Question 19

What happens to asset prices when interest rates decrease?

Answer 19

Lower interest rates can increase the prices of assets like houses and stocks, boosting consumer wealth and spending.

Question 20

What are the impacts of higher interest rates on businesses?

Answer 20

Higher interest rates increase borrowing costs, which may discourage investment and expansion.

Question 21

What is the effect of monetary policy on exchange rates?

Answer 21

Changes in interest rates can influence the value of a currency, affecting the cost of imports and exports.