Monetary policy · AS Level Economics

Some countries experienced a recent decline in investment spending.

What might be done to stop such a decline?

• Aincrease quotas on imports
• Blower interest rates
• Craise income tax
• Dset up training courses

Which action might be part of an expansionary economic policy?

• Areducing the budget deficit
• Breducing the level of government spending
• Creducing the money supply
• Dreducing the rate of interest

What is not a tool of monetary policy?

• Acapital investment
• Bcredit regulations
• Cinterest rates
• Dmoney supply

An economy is at a point within its production possibility curve (PPC).

Which monetary policy will help the government to achieve a macroeconomic objective of lower unemployment?

• Aan increase in credit regulations
• Ban increase in the exchange rate
• Can increase in the interest rate
• Dan increase in the money supply

The central bank of a country has increased interest rates to a high level.

What will increase as a result of this?

• Acost of borrowing
• Beconomic growth
• Cemployment
• Dprice level

Monetary policy can be used to increase the level of business activity.

Which action illustrates this?

• Acurbing consumption through controls on credit
• Beasing credit regulations for banks to increase lending
• Creducing government spending to achieve a budget surplus
• Dstimulating company investments by increasing interest rates

A central bank increases interest rates to reduce inflation.

When will this policy be most likely to succeed?

• AWhen household spending is inelastic in response to interest rate changes.
• BWhen the country has a floating exchange rate that appreciates.
• CWhen the government has an increasing budget deficit.
• DWhen trade unions demand higher wages to protect the living standards of their members.

The government of a country reduces its budget deficit by cutting government spending. At the same time, the central bank raises the interest rates.

When might this combination of policies be used?

inflation rate unemployment rate

• Ahigh high
• Bhigh low
• Clow high
• Dlow low

A central bank is asked by the government to help achieve price stability.

If inflation rises steeply, which policy will not be directly within the control of the central bank?

• Aincreasing the rate of interest to reduce consumer spending
• Bmanaging a reduction of the money supply
• Cusing credit restrictions to regulate lending by commercial banks to households
• Drestricting wage increases in the private and public sectors

What is an example of expansionary monetary policy?

• Athe central bank increasing the money supply
• Bthe central bank causing an appreciation of the country’s foreign exchange rate
• Cthe central bank increasing controls on credit lending
• Dthe central bank increasing the minimum lending rate of interest

A country has a target rate of inflation of 2.5% and has recently experienced the actual rate rising to 6%, with unemployment falling to very low levels.

Which policy option is most likely to be implemented?

• Aan increase in government expenditure on training
• Ban increase in indirect taxes on demerit goods
• Can increase in import tariffs
• Dan increase in interest rates

Which policy is most likely to have a contractionary effect on national income?

• Aa reduction in income tax rates
• Ba reduction in interest rates
• Can appreciation in the exchange rate
• Dan increase in government spending on transport infrastructure

An increase in interest rates is an example of which type of policy?

• Acontractionary fiscal policy
• Bcontractionary monetary policy
• Cexpansionary monetary policy
• Drestrictive supply-side policy

What is not an example of monetary policy?

• Aa rise in import tariffs on manufactured goods
• Ba rise in interest rates by the central bank
• Ca rise in credit regulations
• Da rise in the money supply

What is likely to be an expansionary monetary policy?

• Aa decrease in the availability of credit
• Ba decrease in the exchange rate
• Can increase in government spending
• Dan increase in subsidies for training

A government wants to operate a tighter monetary policy.

What would it increase?

• Abudget surplus
• Binterest rate
• Cmoney supply
• Drates of taxation

A government has a target to reduce the rate of inflation.

Why might it not want to raise interest rates to achieve this target?

• Aaggregate demand may fall
• Baggregate supply may fall
• Csaving may fall
• Dthe exchange rate may fall

If a country is suffering from deflation, what would be the best policy to reflate the economy?

• Aincrease corporation tax
• Bincrease income tax
• Creduce interest rates
• Dreduce spending on education

, , 22 What is not a monetary policy measure?

• Acredit regulations for banks
• Binterest rate changes
• Cincreased government subsidies
• Dmoney supply changes

The government has a macroeconomic objective of low unemployment. It has recently decreased interest rates.

What may limit the effectiveness of this tool in achieving the objective of low unemployment?

• Aa lack of productive capacity
• Bexcess demand in the economy
• Cincreased government spending on infrastructure
• Dlow levels of welfare benefits

A country’s central bank decides to reduce the level of credit regulation.

What is this an example of?

• Acontractionary fiscal policy
• Bcontractionary monetary policy
• Cexpansionary fiscal policy
• Dexpansionary monetary policy

Apart from interest rates, state two other tools of monetary policy that could be used in Japan to control inflation. [2]

With the help of a diagram, explain how a decrease in the interest rate in Japan could lead to the depreciation in the value of the yen and consider whether only Japan’s interest rate determines the value of the yen. [4]

Assess whether low interest rates alone are likely to lead to an increase in aggregate demand in Japan. [6]

Assess whether expansionary monetary policy is the best method to correct deflation and restore price stability. [12]

Assess whether supply-side policy or demand-side policy is the better way of reducing this inflation. [12]

Assess the extent to which maintaining interest rates at a high level will be the best policy for the US to control inflation. [6]

Using the data in Table 1.1, compare changes in the inflation rate and changes in the interest rate in the US. [2]

‘In an attempt to bring about disinflation, the Federal Reserve used a contractionary monetary policy.’ Consider whether disinflation is more harmful than deflation. [4]

Assess whether increases in the interest rate make a recession in the US inevitable. [6]

Assess whether the Federal Reserve setting an inflation target as part of its monetary policy is likely to be helpful for the US economy. [6]