4.5.5 Effects of Monetary Policy

• Adjusting the base rate that commercial banks pay to borrow from the central bank influences interest
• Match the monetary policy type with its objective:

  Expansionary Monetary Policy ↔️ Stimulate economic growth

  Contractionary Monetary Policy ↔️ Control inflation
• What tool is used in contractionary monetary policy to reduce inflation?

  Raise interest rates
• Contractionary monetary policy controls inflation by reducing the money supply
• Contractionary monetary policy slows economic growth by making borrowing more expensive.


  True
• Expansionary policies are most effective during recessions
• The effectiveness of monetary policy depends on economic conditions and policy timing
• Quantitative easing involves purchasing government bonds to inject liquidity
• Contractionary monetary policy aims to control inflation and prevent the economy from overheating.


  True
• How does monetary policy affect inflation?

  Manages money supply
• What does monetary policy manage to influence inflation?

  Money supply and interest rates
• Expansionary monetary policy tends to increase inflation
• The effects of monetary policy on economic growth are independent of whether the policy is expansionary or contractionary.

  False
• How does expansionary monetary policy affect economic growth?

  Increases economic growth
• Match the monetary policy type with its effect on employment:

  Expansionary Monetary Policy ↔️ Increases employment

  Contractionary Monetary Policy ↔️ Decreases employment
• Monetary policy can influence exchange rates by adjusting interest rates and managing the money supply.


  True
• How does expanding the money supply affect the domestic currency?

  Depreciates the currency
• What is the primary objective of monetary policy?

  Manage inflation
• Quantitative easing involves purchasing government bonds to inject liquidity into the economy.


  True
• Lowering interest rates is a tool used in expansionary
• Contractionary monetary policy may lead to higher unemployment.


  True
• How does lowering interest rates affect economic growth under expansionary policy?

  Stimulates investment
• Match the monetary policy type with its effect on employment:

  Expansionary Monetary Policy ↔️ Increases employment

  Contractionary Monetary Policy ↔️ Decreases employment
• How does monetary policy affect employment?

  Influences borrowing costs
• What is the primary goal of monetary policy?

  Stabilize the economy
• Adjusting interest rates is a tool used by central banks to influence borrowing costs.


  True
• What are the tools of expansionary monetary policy?

  Lower interest rates
• One effect of contractionary monetary policy is a potential increase in unemployment
• Match the monetary policy with its objective and effects:

  Expansionary Policy ↔️ Stimulate growth, increase inflation

  Contractionary Policy ↔️ Control inflation, slow growth
• Expansionary monetary policy can lead to higher inflation as it encourages borrowing and spending.

  True
• What is the primary effect of contractionary monetary policy on inflation?

  Decreases inflation
• Contractionary monetary policy reduces economic growth by making borrowing more expensive
• What is an example of expansionary monetary policy used during a recession?

  Lowering interest rates
• Higher interest rates tend to appreciate the domestic currency
• Arrange the effects of expansionary monetary policy on exchange rates in the correct order:

  1️⃣ Lowering interest rates

  2️⃣ Increasing money supply

  3️⃣ Currency depreciates

  4️⃣ Exports become more competitive

  5️⃣ Imports become more expensive
• What is a weakness of monetary policy in controlling the economy?

  Time lag in effects
• Contractionary monetary policy worsens the trade balance by making exports less competitive and imports cheaper.


  True
• One strength of monetary policy is its quick implementation