4.5.5 Effects of Monetary Policy

• Monetary policy tools influence the economy by controlling the cost and availability of money
• Monetary policy is used exclusively to control inflation.

  False
• Monetary policy tools help manage inflation, promote economic growth, and maintain employment
• Match the monetary policy tool with its effect on the economy:

  Interest Rates ↔️ Lower rates stimulate borrowing

  Reserve Requirements ↔️ Lower requirements increase lending capacity

  Open Market Operations ↔️ Buying securities increases money supply
• Monetary policy is crucial for controlling the rate of inflation
• Quantitative easing is always effective in controlling inflation.

  False
• Expansionary monetary policy aims to reduce unemployment during a recession
• What are the effects of contractionary monetary policy on inflation and economic growth?

  Combats inflation, slows growth
• Lowering interest rates reduces borrowing costs for businesses and consumers.

  True
• Open market operations involve buying government securities to increase the money supply
• What is monetary policy defined as?

  Actions to influence money supply
• Effects of lowering interest rates on the economy

  1️⃣ Borrowing becomes cheaper

  2️⃣ Businesses invest more

  3️⃣ Consumers spend more

  4️⃣ Economic growth increases
• What are the three main tools of monetary policy?

  Interest rates, reserve requirements, open market operations
• What are the goals of monetary policy?

  Manage inflation, growth, employment
• How do open market operations affect the economy?

  Buying securities increases money supply
• Effects of raising interest rates on inflation

  1️⃣ Borrowing becomes more expensive

  2️⃣ Consumer spending decreases

  3️⃣ Businesses invest less

  4️⃣ Inflation decreases
• How does lowering interest rates affect employment?

  Stimulates investment and spending
• Contractionary monetary policy can lead to higher unemployment.


  True
• Monetary policy influences employment levels by managing the money supply and credit conditions
• What happens to lending capacity when reserve requirements are decreased?

  Increases
• Expansionary monetary policy is used to combat inflation during a recession.

  False
• What might a central bank do in response to an economic downturn to increase employment opportunities?

  Lower interest rates
• Monetary policy aims to manage inflation, promote economic growth, and maintain employment
• What is the effect of higher reserve requirements on bank lending capacity?

  Decreases
• How do higher interest rates affect demand-pull inflation?

  Reduce it
• Quantitative easing involves large-scale asset purchases to increase the money supply
• Lowering interest rates can encourage businesses to invest and consumers to spend.

  True
• What is the purpose of expansionary monetary policy?

  Stimulate economic growth
• What is the goal of contractionary monetary policy?

  Combat inflation
• What happens to the money supply when the central bank buys government securities?

  Increases
• When is expansionary monetary policy typically used?

  During a recession
• What is a central bank?

  Financial institution managing currency
• Order the key functions of central banks:

  1️⃣ Monetary Policy Implementation

  2️⃣ Bank Supervision

  3️⃣ Currency Management

  4️⃣ Payment Systems Oversight
• Independence of central banks is crucial for effective monetary policy.

  True
• During an economic downturn, a central bank may lower interest rates to encourage borrowing and investment
• Japan's deflationary struggles in the 1990s-2000s were resolved by aggressive monetary policies.

  False
• Japan faced prolonged deflation in the 1990s despite repeatedly cutting interest rates and launching QE
• Match the monetary policy tool with its effect on the economy:

  Interest Rates ↔️ Lower rates stimulate borrowing

  Reserve Requirements ↔️ Lower requirements increase lending

  Open Market Operations ↔️ Buying securities increases money supply
• Lower interest rates can lead to higher inflation.


  True
• Steps taken by monetary policy to manage inflation:

  1️⃣ Set interest rates

  2️⃣ Adjust reserve requirements

  3️⃣ Conduct open market operations

  4️⃣ Use quantitative easing