Monetary policy practice questions

Q1. Money has importance in an economy because it:

a. Acts as a medium of exchange,
b. Provides a way of storing wealth,
c. Provides society with a convenient measure of value and a unit of account.
d. All of the above

Q2. Compared to barter system, a monetary system:

a. Increases transaction costs.
b. Decreases the number of transactions
c. Requires that prices be negotiated for every transaction.
d. Reduces transactions costs and facilitates exchanges.

Q3. The functions of money are:

a. Medium of exchange and unit of account.
b. Medium of exchange, unit of account, and store of value.
c. Medium of account and store of value.
d. Store of value and unit of account.

Q4. A medium of exchange is:

a. Something that is generally acceptable in exchange for goods and services
b. A legally recognized asset that is generally accepted in exchange for goods and
services.
c. Something that circulates and provides a standardized means of evaluating the
relative price of goods and services.
d. The ability of money to command purchasing power in the future

Q5. A unit of account:

a. Something that is generally acceptable in exchange for goods and services
b. A legally recognized asset that is generally accepted in exchange for goods and
services.
c. Something that circulates and provides a standardised means of evaluating the
relative price of goods and services.
d. The ability of money to command purchasing power in the future
Q6. Store of value:
a. Something that is generally acceptable in exchange for goods and services
b. A legally recognized asset that is generally accepted in exchange for goods and
services.
c. Something that circulates and provides a standardised means of evaluating the
relative price of goods and services.
d. The ability of money to command purchasing power in the future

Q7. Under a fiat-money standard the value of the circulating medium of exchange is
guaranteed by:
a. Some precious commodity such as gold or silver.
b. By the taxing and borrowing powers of the government.
c. The paper it is printed on.
d. Does not have any value.

Q8. Money can be many things, but it is not

a. A financial liability.
b. A financial asset.
c. Liquid.
d. Illiquid.

Q9. A central bank is:

a. A bank located in the centre of the capital city.
b. Responsible for the conduct of overall economic policy.
c. Responsible for the conduct of a country's monetary policy.
d. A nation's single most important deposit accepting institution.

Q10. The European Central Bank:

a. Controls and manages the euro areas debt.
b. Regulates and supervises the euro areas banks.
c. Controls and manages all financial resources in the euro area.
d. Controls and manages the euro areas country's money supply.
Q11. M1 is defined as:
a. Currency in circulation + overnight deposits.
b. Deposits with maturity up to two years and deposits redeemable with a notice up
to three months.
c. Repurchase agreements, money market fund shares and debt securities with
maturity up to two years.
d. All of the above.

Q12. M3 is defined as:

a. Currency in circulation + overnight deposits.
b. Deposits with maturity up to two years and deposits redeemable with a notice up
to three months.
c. Repurchase agreements, money market fund shares and debt securities with
maturity up to two years.
d. All of the above.

Q13. If an individual moves money from a money market deposit account to a

demand deposit account:
a. M1 increases and M2 decreases
b. M1 increases and M2 stays the same.
c. M1 stays the same and M2 increases.
d. M1 stays the same and M2 stays the same.

Q14. The suggestion that changes in the price level are directly related to changes in
the money stock is represented by:
a. Money supply multiplier
b. Open market operations
c. Quantity theory of money
d. Liquidly trap
Q15. A customer deposits €1,500 in AIB bank. The required reserve ratio is 1%.
What is the potential increase in the money supply?
a. €1,500
b. €15,000
c. €150,000
d. €1,500,000

Q16. What is the reserve requirement ratio?

a. The proportion of money the ECB lends to commercial banks
b. The proportion of total deposits commercial banks keep as reserves
c. The total proportion of money that commercial banks lend to the customers
d. None of the above

Q17. A reserve ratio of 0.10 means that a bank loans out __________ percent of
its_______
a. 10; deposit liabilities
b. 10; excess reserves
c. 90; deposit liabilities
d. 90; excess reserves

Q18. Monetary policy affects
a. Inflation only.
b. Output only.
c. Noth inflation and output.
d. Neither inflation nor output.

Q19. Which of the following represent the transactions related motive for holding
money?
a. The need to hold money for liquidity for transactions and are positively related to
GDP.
b. The need to hold money to provide a buffer for unexpected events.
c. When money is held in anticipation that other assets will decline in value.
d. None of these answers are correct
Q20. Which of the following represent the precautionary related motive for holding
money?
a. The need to hold money for liquidity for transactions and are positively related to
GDP.
b. The need to hold money to provide a buffer for unexpected events.
c. When money is held in anticipation that other assets will decline in value.
d. None of these answers are correct

Q21. Which of the following represent the speculative motive for holding money?
a. The need to hold money for liquidity for transactions and are positively related to
GDP.
b. The need to hold money to provide a buffer for unexpected events.
c. When money is held in anticipation that other assets will decline in value.
d. None of these answers are correct

Q22. Which of the following gives the correct relationship between nominal and real
interest rates?
a. Real interest rate = nominal interest rate + expected inflation rate
b. Nominal interest rate = real interest rate + expected inflation rate
c. Expected inflation rate = nominal interest rate + real interest rate
d. Nominal interest rate = real interest rate / expected inflation rate

Q23. Suppose an expansionary monetary policy reduces nominal interest rates. If

this is the case, it follows that the expansionary monetary policy must have
a. Reduced expected inflation.
b. Increased expected inflation.
c. Increased expected inflation less than it reduced real interest rates.
d. Reduced real interest rates less than it increased expected inflation

Q24. Central banks are often charged with:

a. Supervising the nation’s banking system.
b. Regulating and overseeing the payments system.
c. All of these answers are correct
d. Operating a nation’s monetary policy.
Q25. If the Central Bank wanted to stimulate aggregate demand, it could:
a. raise the target range for the overnight refinancing rate, thereby reducing interest
rates throughout the economy.
b. raise the overnight refinancing rate, thereby increasing interest rates throughout
the economy.
c. lower the overnight refinancing rate, thereby reducing interest rates throughout the
economy.
d. lower the target range for the overnight refinancing rate, thereby increasing
interest rates throughout the economy.

Q26. Which of the following is an example of an expansionary monetary policy?

a. Raising the bank rate.
b. Raising the overnight refinancing rate.
c. Selling bonds.
d. Buying bonds.

Q27. Central Bank sales of government bonds ________ bank reserves, and
_______ the money supply.
a. increase; increase
b. decrease; decrease
c. decrease; increase
d. increase; decrease

Q28. Unexpected inflation is costly because:

a. It is not factored into wage negotiations and contracts,
b. The uncertainty regarding inflation can affect (and exacerbate) the business cycle.
c. Can effect consumption and investment decisions
d. All of the above

Q29. The European Central Bank uses:

a. Inflation targeting
b. Exchange rate targeting
c. Unemployment targeting
d. Inflation and economic growth targeting
Q30. Exchange rate targeting:
a. Requires setting a band for the target exchange rate against a major currency.
b. The central bank buys and sells foreign currency toward the goal.
c. If often entered into to facilitate trade
d. All of the above

Q31. Effective central banks are:

a. Independent
b. Credible
c. Transparent
d. All of the above

Q32. The neutral rate of interest is the interest rate that neither encourages nor
discourages growth is:
a. Trend growth + Inflation target
b. Trend growth - Inflation target
c. Trend growth – unexpected inflation
d. Trend growth – expected inflation

Q33. Increasing the interest rate results in _____ liquidity in the system, and thus,
this policy is ________ and will _______ inflation:
a. Reduced, contractionary, reduce
b. Reduced, expansionary, reduce
c. Reduced, contractionary, increase
d. Increased, contractionary, reduce

Q34. In the AS/AD model, an expansionary monetary policy

a. increases aggregate demand by reducing interest rates.
b. increases aggregate demand by raising interest rates.
c. reduces aggregate demand by reducing interest rates.
d. reduces aggregate demand by raising interest rates.
Q35. Countercyclical monetary policy in the AS/AD model involves
a. contractionary monetary policy throughout the business cycle.
b. expansionary monetary policy throughout the business cycle.
c. contractionary monetary policy during boom periods and expansionary monetary
policy during recession.
d. contractionary monetary policy during recession and expansionary monetary
policy during boom periods.

Q36. The monetary transmission mechanism refers to the:

a. Process that occurs when expansionary fiscal policy being crowded out
b. Process in which monetary policy affects the price level
c. Adjustment process that occurs after a shift in the IS-curve
d. Effects of a change in the income tax rate on consumption and investment
Q37. When the economy is in a liquidity trap:
a. Monetary policy is ineffective in changing the interest rate
b. Monetary policy is ineffective in changing the level of output
c. Fiscal policy is most effective in changing the level of output
d. All of the above