MCQ Quiz

Assertion (A): According to the concept of money neutrality, an increase in the money supply will increase real output and employment in the long run.
Reason (R): In the long run, prices and wages adjust fully to changes in the money supply, leaving real variables unchanged.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Assertion (A): Quantitative Easing involves central banks purchasing securities to inject liquidity when the policy rate is at or near zero.
Reason (R): QE is distinct from standard open market operations because it targets the credit risk and term structure of interest rates rather than just the short-term risk-free rate.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Assertion (A): Unexpected inflation transfers wealth from borrowers to lenders.
Reason (R): When inflation is higher than anticipated, the real value of the future loan repayments is lower than what was agreed upon in the contract.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Regarding exchange rate targeting as a monetary policy strategy, consider the following statements:
(1) By fixing the domestic currency to a low-inflation foreign currency, a developing economy can effectively import the foreign country's inflation experience.
(2) To maintain a fixed exchange rate target, the domestic central bank must allow its interest rates and money supply to adjust independently of the target currency's country.
(3) If the domestic inflation rate rises above that of the target currency's country, the central bank must sell foreign reserves and buy domestic currency to support the exchange rate.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Consider the following statements about the monetary policy transmission mechanism:
(1) An increase in the official policy rate is expected to depreciate the domestic currency, thereby boosting export competitiveness.
(2) Higher interest rates typically reduce asset prices, which lowers household financial wealth and consumption.
(3) The transmission of policy rate changes to long-term interest rates depends heavily on market expectations regarding future inflation and policy actions.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only

Consider the following statements about the monetary policy transmission mechanism:
(1) An increase in the official policy rate is expected to depreciate the domestic currency, thereby boosting export competitiveness.
(2) Higher interest rates typically reduce asset prices, which lowers household financial wealth and consumption.
(3) The transmission of policy rate changes to long-term interest rates depends heavily on market expectations regarding future inflation and policy actions.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only

Consider the following statements regarding the limitations of monetary policy:
(1) 'Bond market vigilantes' may push long-term interest rates higher if they believe the central bank's expansionary policy will lead to high inflation.
(2) In a liquidity trap, where short-term rates are near zero, traditional open market operations become ineffective at stimulating the economy.
(3) The central bank can directly control the amount of lending banks undertake by setting the base rate.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only

Consider the following statements regarding the roles of central banks in a modern economy:
(1) In a fiat money system, the central bank's ability to supply currency is constrained by the amount of gold reserves it holds.
(2) The central bank acts as a lender of last resort to prevent bank runs by providing liquidity when the interbank market freezes.
(3) Central banks in all G10 countries are the sole supervisory authority for their respective banking systems.
Which of the statements given above are correct?

• 2 only
• 1 and 2 only
• 2 and 3 only

Assertion (A): In the face of a negative supply shock (e.g., oil price spike), increasing the policy rate is the unambiguous optimal response for an inflation-targeting central bank.
Reason (R): A negative supply shock increases inflation and simultaneously reduces output, creating a policy dilemma where fighting inflation exacerbates the downturn.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Assertion (A): Operational independence allows a central bank to define its own inflation target.
Reason (R): Target independence refers to the freedom to set the goals of monetary policy, while operational independence refers to the freedom to choose the instruments to achieve those goals.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Consider the role of credibility in monetary policy:
(1) If a central bank lacks credibility, an announcement of an inflation target is likely to be ignored by wage setters, leading to higher actual inflation.
(2) Credibility decreases the cost of disinflation because inflation expectations adjust more rapidly to policy announcements.
(3) Central banks can enhance credibility by deviating from announced targets whenever short-term economic growth slows down.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only

Consider the following statements regarding the neutral rate of interest:
(1) The neutral rate is the rate of interest that neither stimulates nor slows down the underlying economy.
(2) The neutral rate is calculated as the sum of the real trend rate of economic growth and the central bank's inflation target.
(3) If the central bank's policy rate is below the neutral rate, the monetary policy stance is considered contractionary.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Regarding the tools used by central banks to implement monetary policy, consider the following statements:
(1) When a central bank engages in a repurchase agreement (repo) to buy bonds from commercial banks, it increases the banks' reserves and expands the money supply.
(2) An increase in the reserve requirement ratio allows commercial banks to lend a higher proportion of their deposits, thereby increasing the money multiplier.
(3) The central bank's policy rate is typically the rate at which it is willing to lend short-term funds to commercial banks.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Consider the following statements regarding the money creation process:
(1) The money multiplier is inversely related to the reserve requirement ratio set by the central bank.
(2) If banks choose to hold excess reserves above the statutory minimum, the effective money multiplier increases.
(3) Broad money growth depends on both the expansion of the monetary base and the willingness of banks to lend.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Consider the role of credibility in monetary policy:
(1) If a central bank lacks credibility, an announcement of an inflation target is likely to be ignored by wage setters, leading to higher actual inflation.
(2) Credibility decreases the cost of disinflation because inflation expectations adjust more rapidly to policy announcements.
(3) Central banks can enhance credibility by deviating from announced targets whenever short-term economic growth slows down.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only

With respect to inflation-targeting frameworks, consider the following statements:
(1) Successful inflation targeting requires the central bank to be operationally independent from the government to avoid political pressure for short-term stimulus.
(2) Inflation-targeting central banks typically target a zero percent inflation rate to maximize price stability.
(3) Transparency, such as publishing inflation reports, is essential to anchor the private sector's inflation expectations.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only

Assertion (A): A contractionary monetary policy generally leads to a decrease in equity and real estate prices.
Reason (R): Higher discount rates reduce the present value of future cash flows, and higher borrowing costs dampen the demand for assets purchased on credit.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Assertion (A): A central bank's policy is considered expansionary only if it cuts the official policy rate.
Reason (R): An expansionary stance is defined by the policy rate being lower than the neutral rate of interest.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Consider the following statements regarding the roles of central banks in a modern economy:
(1) In a fiat money system, the central bank's ability to supply currency is constrained by the amount of gold reserves it holds.
(2) The central bank acts as a lender of last resort to prevent bank runs by providing liquidity when the interbank market freezes.
(3) Central banks in all G10 countries are the sole supervisory authority for their respective banking systems.
Which of the statements given above are correct?

• 2 only
• 1 and 2 only
• 2 and 3 only

Consider the following statements regarding the money creation process:
(1) The money multiplier is inversely related to the reserve requirement ratio set by the central bank.
(2) If banks choose to hold excess reserves above the statutory minimum, the effective money multiplier increases.
(3) Broad money growth depends on both the expansion of the monetary base and the willingness of banks to lend.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

With respect to inflation-targeting frameworks, consider the following statements:
(1) Successful inflation targeting requires the central bank to be operationally independent from the government to avoid political pressure for short-term stimulus.
(2) Inflation-targeting central banks typically target a zero percent inflation rate to maximize price stability.
(3) Transparency, such as publishing inflation reports, is essential to anchor the private sector's inflation expectations.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only

Assertion (A): Central banks with inflation-targeting mandates publish Inflation Reports to influence the expectations of economic agents.
Reason (R): If economic agents believe the central bank is committed to the target, inflation expectations will become anchored, reducing the output cost of stabilizing prices.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Regarding Quantitative Easing (QE), consider the following statements:
(1) QE involves the purchase of assets on a much larger scale than traditional open market operations, expanding the central bank's balance sheet.
(2) The primary goal of QE is to lower short-term overnight interest rates which are already positive.
(3) QE aims to reduce the yield on long-term assets and encourage investors to move into riskier assets.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Assertion (A): 'Bond market vigilantes' can effectively negate an expansionary monetary policy by driving up long-term interest rates.
Reason (R): If investors believe a central bank's loose policy will lead to future inflation, they may sell long-term bonds, increasing yields despite the central bank's efforts to lower short-term rates.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

An analyst is assessing the combined effect of fiscal and monetary policies. Consider the following statements:
(1) If fiscal policy is expansionary and monetary policy is contractionary, interest rates will likely rise and the public sector's share of GDP will increase.
(2) If both fiscal and monetary policies are expansionary, interest rates will unambiguously fall while output rises.
(3) Tight fiscal policy combined with expansive monetary policy generally leads to lower interest rates and a growing private sector share of GDP.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Consider the following statements regarding the limitations of monetary policy:
(1) 'Bond market vigilantes' may push long-term interest rates higher if they believe the central bank's expansionary policy will lead to high inflation.
(2) In a liquidity trap, where short-term rates are near zero, traditional open market operations become ineffective at stimulating the economy.
(3) The central bank can directly control the amount of lending banks undertake by setting the base rate.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only

Regarding the relationship between interest rates and inflation, consider the following statements:
(1) The Fisher effect states that the nominal interest rate is the sum of the real interest rate and the expected inflation rate.
(2) If the central bank increases the money supply growth rate, in the long run, the nominal interest rate will decrease due to the liquidity effect.
(3) Money neutrality implies that in the long run, an increase in the money supply affects nominal variables like prices but not real variables like output.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Regarding Quantitative Easing (QE), consider the following statements:
(1) QE involves the purchase of assets on a much larger scale than traditional open market operations, expanding the central bank's balance sheet.
(2) The primary goal of QE is to lower short-term overnight interest rates which are already positive.
(3) QE aims to reduce the yield on long-term assets and encourage investors to move into riskier assets.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Assertion (A): If the central bank sets its policy rate equal to the estimated neutral rate of interest, the monetary policy stance is considered neutral.
Reason (R): The neutral rate is the sum of the real trend rate of economic growth and the central bank's inflation target.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Consider the following statements regarding the forms and definitions of money:
(1) Money serves as a unit of account only if it is backed by a physical commodity like gold.
(2) Broad money typically includes currency in circulation, overnight deposits, and longer-term deposits that are less liquid.
(3) As the sole supplier of currency, the central bank can theoretically expand the supply of fiat money indefinitely.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only

Regarding exchange rate targeting as a monetary policy strategy, consider the following statements:
(1) By fixing the domestic currency to a low-inflation foreign currency, a developing economy can effectively import the foreign country's inflation experience.
(2) To maintain a fixed exchange rate target, the domestic central bank must allow its interest rates and money supply to adjust independently of the target currency's country.
(3) If the domestic inflation rate rises above that of the target currency's country, the central bank must sell foreign reserves and buy domestic currency to support the exchange rate.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Regarding the relationship between interest rates and inflation, consider the following statements:
(1) The Fisher effect states that the nominal interest rate is the sum of the real interest rate and the expected inflation rate.
(2) If the central bank increases the money supply growth rate, in the long run, the nominal interest rate will decrease due to the liquidity effect.
(3) Money neutrality implies that in the long run, an increase in the money supply affects nominal variables like prices but not real variables like output.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Assertion (A): A developing country targeting a fixed exchange rate against the US dollar loses the ability to conduct independent domestic monetary policy.
Reason (R): To maintain the peg, the domestic central bank must adjust its money supply and interest rates to mirror the anchor country's inflation and monetary conditions, regardless of domestic needs.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Assertion (A): A policy mix of loose fiscal policy and loose monetary policy is the most effective strategy for reducing interest rates.
Reason (R): Loose monetary policy increases the money supply, while loose fiscal policy increases the demand for loanable funds.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Consider the following statements regarding the neutral rate of interest:
(1) The neutral rate is the rate of interest that neither stimulates nor slows down the underlying economy.
(2) The neutral rate is calculated as the sum of the real trend rate of economic growth and the central bank's inflation target.
(3) If the central bank's policy rate is below the neutral rate, the monetary policy stance is considered contractionary.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Assertion (A): An unexpected increase in the official policy rate generally causes the domestic currency to appreciate.
Reason (R): Higher domestic interest rates attract foreign capital seeking higher yields, increasing the demand for the domestic currency.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Assertion (A): Deflation limits the effectiveness of expansionary monetary policy.
Reason (R): In a deflationary environment, even a nominal interest rate of zero results in a positive real interest rate, which may still be too high to stimulate investment.

• Both A and R are true and R is the correct explanation of A
• Both A and R are true but R is not the correct explanation of A
• A is true but R is false
• A is false but R is true

Consider the costs associated with inflation:
(1) Expected inflation allows economic agents to adjust nominal contracts, minimizing the redistributive cost of inflation.
(2) Unexpected inflation redistributes wealth from borrowers to lenders.
(3) High inflation rates typically increase the information costs for economic agents, blurring price signals.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Consider the costs associated with inflation:
(1) Expected inflation allows economic agents to adjust nominal contracts, minimizing the redistributive cost of inflation.
(2) Unexpected inflation redistributes wealth from borrowers to lenders.
(3) High inflation rates typically increase the information costs for economic agents, blurring price signals.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Regarding the tools used by central banks to implement monetary policy, consider the following statements:
(1) When a central bank engages in a repurchase agreement (repo) to buy bonds from commercial banks, it increases the banks' reserves and expands the money supply.
(2) An increase in the reserve requirement ratio allows commercial banks to lend a higher proportion of their deposits, thereby increasing the money multiplier.
(3) The central bank's policy rate is typically the rate at which it is willing to lend short-term funds to commercial banks.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

An analyst is assessing the combined effect of fiscal and monetary policies. Consider the following statements:
(1) If fiscal policy is expansionary and monetary policy is contractionary, interest rates will likely rise and the public sector's share of GDP will increase.
(2) If both fiscal and monetary policies are expansionary, interest rates will unambiguously fall while output rises.
(3) Tight fiscal policy combined with expansive monetary policy generally leads to lower interest rates and a growing private sector share of GDP.
Which of the statements given above are correct?

• 1 and 2 only
• 1 and 3 only
• 2 and 3 only

Consider the following statements regarding the forms and definitions of money:
(1) Money serves as a unit of account only if it is backed by a physical commodity like gold.
(2) Broad money typically includes currency in circulation, overnight deposits, and longer-term deposits that are less liquid.
(3) As the sole supplier of currency, the central bank can theoretically expand the supply of fiat money indefinitely.
Which of the statements given above are correct?

• 1 and 2 only
• 2 and 3 only
• 1 and 3 only