Discuss:

 ECB and monetary policy

Q1 Which one of the following is not included in the Eurosystem M1 money stock?

a. Deposits with maturity up to and including two years.

b. Overnight deposits.
c. Currency in circulation.
d. None of the above - they are all included in M1.

Answer: __________ (Ans = A)

Q2 Which statement best describes the Eurosystem monetary aggregate M2?

a. M1 plus overnight deposits.

b. M1 plus debt securities with maturity of up to and including two years.
c. M1 plus deposits with maturity of up to and including two years and deposits
redeemable at notice of up to and including three months.
d. Currency in circulation plus short-term deposits (other than overnight deposits).
e. None of the above.

Answer: __________ (Ans = C)

Q3 Which of the following statements is NOT true?

a. The purchase of government bonds from the public increases the money supply.
b. Monetary policy in the euro area is set by the Governing Council of the European
Central Bank.
c. When the central bank sells government bonds to the public, the money supply
decreases.
d. Commercial banks may borrow from and lend to each other and the interest rate
at which they do this is called the marginal lending rate.
e. If the central bank raises its refinancing rate then the commercial banks will try
to reduce their lending and so reduce the need to borrow from the central bank.

Answer: __________ (Ans = D)

1
Q4 Which of the following statements is NOT correct?

a. Deflation refers to a situation in which the price level is falling.

b. When the price level is falling there is always an incentive to delay spending and
so there is a negative effect on economic activity.
c. Deflation is associated with a flagging economy. Businesses and consumers are
then likely to reduce their spending.
d. Some inflation in any economy is desirable because it is a sign that demand is
present, that there is a reason to produce and invest, and that there is reward to
be gained from enterprise.
e. Deflation is good for workers because with wages falling there will be plenty of
employment opportunities.

Answer: __________ (Ans = E)

Q5 The supply of money in the euro area is determined by

a. the price level.

b. the Finance ministries of the euro area Member States.
c. the European Central Bank.
d. the demand for money.
e. None of the above.

Answer: __________ (Ans = C)

Q6 If an economy’s inflation rate is above target, the central bank would be most likely
to

a. encourage banks to provide loans by lowering the refinancing rate.

b. encourage banks to provide loans by raising the refinancing rate.
c. restrict bank lending by lowering the refinancing rate.
d. restrict bank lending by raising the refinancing rate.

Answer: __________ (Ans = D)

2
Q7 If there is a general shortage of liquidity in the money market then

a. the economy’s banking system will lend more money to households and firms.
b. the short-term interest rate at which the economy’s commercial banks lend to
and borrow from each other will fall and the central bank may be expected to
reduce the supply of liquidity to the banks.
c. the short-term interest rate at which the economy’s commercial banks lend to
and borrow from each other will rise and the central bank may be expected to
reduce the supply of liquidity to the banks.
d. the short-term interest rate at which the economy’s commercial banks lend to
and borrow from each other will rise and the central bank may be expected to
increase the supply of liquidity to the banks.
e. the short-term interest rate at which the economy’s commercial banks lend to
and borrow from each other will fall and the central bank may be expected to
increase the supply of liquidity to the banks.

Answer: __________ (Ans = D)

Q8 Which one of the following would be expected to occur as a result of the open
market sale of government bonds by the Central Bank?

a. Increase in Real GDP.

b. Increase in interest rates charged on loans.
c. Increase in the number of loans made by the commercial banks.
d. Decrease in the money supply.
e. Both (b) and (d).

Answer: __________ (Ans = E)

Q9 Which of the following statements is incorrect?

a. The Eurosystem is made up of the European Central Bank (ECB) plus the
national central banks of the 19 countries comprising the euro area.
b. The European System of Central Banks (ESCB) comprises the ECB and the
national central banks of all EU Member States.
c. The General Council of the ECB consists of the members of the Executive Board
plus the governors of the national central banks of the euro area countries.
d. An important feature of the ECB and the Eurosystem is its independence from
the political process or any external body.
e. In the European Union, there is a single monetary policy for the euro area
countries.

Answer: __________ (Ans = C)

3
Q10 The Eurosystem standing facility that commercial banks can use if they have excess
liquidity (too much money) is known as

a. the deposit facility.

b. the marginal lending facility.
c. the main refinancing operations.
d. the EONIA.
e. None of the above.

Answer: __________ (Ans = A)

Q11 When the central bank increases the money supply,

a. it lowers the interest rate and reduces the quantity of goods and services
demanded at any given price level, shifting aggregate demand to the right.
b. it lowers the interest rate and increases the quantity of goods and services
demanded at any given price level, shifting aggregate demand to the right.
c. it lowers the interest rate and reduces the quantity of goods and services
demanded at any given price level, shifting aggregate demand to the left.
d. it raises the interest rate and reduces the quantity of goods and services
demanded at any given price level, shifting aggregate demand to the left.
e. it raises the interest rate and reduces the quantity of goods and services
demanded at any given price level, shifting aggregate demand to the right.

Answer: __________ (Ans = B)

Q12 Which statement best describes the marginal lending facility?

a. A standing facility of the Eurosystem which counterparties (i.e. financial

institutions such as banks) may use to make overnight deposits at a national
central bank.
b. Regular liquidity-providing transactions generally with a maturity of one week.
c. The overnight interbank interest rate for the euro area. In other words, it is the
rate at which banks provide loans to each other with a duration of 1 day.
d. It allows counterparties to obtain overnight liquidity from the euro area national
central banks.
e. None of the above.

Answer: __________ (Ans = D)

4
Q13 Which of the following statements is correct?

a. The Euribor rates are the average inter-bank interest rates at which European
banks are prepared to lend to one another.
b. Euribor rates are reference rates in the euro inter-bank money market and are
published daily.
c. There are 5 different Euribor rates, all with different maturities.
d. Since the Euribor rates are based upon agreements between many European
banks, the level of the rates is determined by supply and demand in the first
place.
e. All of the above are correct.

Answer: __________ (Ans = E)

Q14 Which of the following statements is incorrect?

a. If the ECB increases its main refinancing interest rate (MRIR), the demand curve
in the inter-bank market shifts to the left and Euribor rates will decrease.
b. There is a strong response of inter-bank interest rates (like Euribor) to changes
in the ECB refinancing rate. This implies that the ECB interest rate can be used as
a tool to influence market interest rates.
c. If the ECB reduces its MRIR, banks will borrow from the ECB, easing demand in
the inter-bank market and thereby driving Euribor rates down.
d. Euribor rates provide the basis for the price or interest rate of various financial
products, such as mortgages, savings accounts, car loans, etc.

Answer: __________ (Ans = A)

Q15 Which statement best describes quantitative easing?

a. The central bank buys short-term government bonds (increasing the money
supply) to lower short-term inter-bank interest rates.
b. The central bank increases the price and the interest yield on government bonds
making it more expensive for governments to borrow on financial markets.
c. By purchasing large quantities of longer-term government bonds, the central
bank greatly increases the liabilities on its balance sheet.
d. The central bank commits to buying specified quantities of longer-term
securities in order to add money directly into the economy, with the aim of
stimulating economic activity.
e. None of the above.

Answer: __________ (Ans = D)