Economics - Economics Section 2

72. Which of the following is least likely a feature of an inflation-targeting framework?

  • Option : B
  • Explanation : Inflation targeting requires an independent and credible central bank. A and C are features of an inflation-targeting framework.
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73. In an effort to influence the economy, a central bank conducted open market activities by buying government bonds. This implies that the central bank is most likely attempting to:

  • Option : A
  • Explanation : Buying government bonds results in an increase of the bank’s reserves and increases banks’ ability to lend, causing an increase in money growth through the multiplier mechanism and results in an expansion in the economy.
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74. Which of the following actions on the part of the central bank is most consistent with a contractionary monetary policy?

  • Option : C
  • Explanation : When a central bank sells securities, bank reserves decrease. So the banks have to decrease their lending, thereby decreasing the money supply.
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75. Monetary policy is most likely to be contractionary for:

 GDP growth rate  Inflation TargetPolicy Rate
A.  3%2%6%
B.   1%4%5%
C  2%3% 4%

  • Option : A
  • Explanation : Monetary policy is contractionary when the policy rate is above the neutral rate. Hence, when policy rate is 6% and neutral rate is 5% (3% + 2%), the policy is contractionary.
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