4.4 Monetary Policy

• Lowering interest rates during a recession encourages borrowing and spending.


  True
• Open market operations involve the central bank buying or selling government securities to inject or withdraw money from the economy.


  True
• Open market operations allow the central bank to quickly adjust the money supply
• The central bank adjusts monetary policy tools to expand or contract the money supply to achieve its economic policy goals, such as maintaining price stability
• How does the central bank influence the money supply using open market operations?

  By buying or selling bonds
• Increasing reserve requirements reduces the amount of money banks can lend
• Monetary policy aims to achieve economic stability by influencing interest rates, inflation, and employment
• Match the monetary policy tool with its function:

  Interest Rates ↔️ Adjust borrowing costs

  Reserve Requirements ↔️ Set deposit percentages

  Open Market Operations ↔️ Buy or sell securities
• Steps a central bank might take during an economic downturn to increase the money supply:

  1️⃣ Lower interest rates

  2️⃣ Reduce reserve requirements

  3️⃣ Buy government securities
• What are the three key tools of monetary policy used by central banks?

  Interest rates, reserve requirements, open market operations
• Buying government bonds by the central bank increases the money supply
• Raising interest rates makes borrowing more expensive, helping to slow inflation.


  True
• Monetary policy aims to achieve economic stability by influencing interest rates, inflation, and employment.


  True
• Open market operations involve buying or selling government securities
• Lowering interest rates encourages more borrowing and spending
• Raising interest rates reduces spending and inflation
• An expansionary monetary policy involves lower interest rates and an increased money supply
• Ordering the effects of an expansionary monetary policy:

  1️⃣ Interest rates are lowered

  2️⃣ Borrowing and spending increase

  3️⃣ Economic growth is stimulated

  4️⃣ Inflation may increase
• Match the monetary policy limitation with its description:

  Lag in Effectiveness ↔️ Time delay before effects are felt

  Conflicting Objectives ↔️ Tradeoffs between competing goals

  Zero Lower Bound ↔️ Limited room for interest rate cuts
• Increasing reserve requirements during inflation reduces loanable funds
• Lowering interest rates encourages more borrowing and spending
• The primary aim of monetary policy is to achieve economic stability by influencing interest rates, inflation, and employment.


  True
• What is the primary aim of monetary policy?

  Economic stability
• Match the monetary policy tool with its effect on the money supply:

  Lowering interest rates ↔️ Increases money supply

  Increasing reserve requirements ↔️ Decreases money supply
• How does selling government bonds affect inflation?

  Reduces inflation
• What is the effect of increasing reserve requirements during inflation?

  Reduces loanable funds
• Match the monetary policy tool with its function:

  Interest Rates ↔️ Adjust the cost of borrowing

  Reserve Requirements ↔️ Set deposit percentage banks hold

  Open Market Operations ↔️ Buy or sell government securities
• Steps in using open market operations to increase the money supply:

  1️⃣ The central bank buys government securities

  2️⃣ Banks receive funds from the central bank

  3️⃣ Banks lend out excess reserves

  4️⃣ The money supply increases
• Match the monetary policy tool with its effect on inflation:

  Interest Rates ↔️ Reduce inflation

  Reserve Requirements ↔️ Moderately reduce inflation
• The unpredictable nature of the economy makes the exact impact of monetary policy tools difficult to predict.


  True
• Order the effects of lowering interest rates during a recession:

  1️⃣ Encourages borrowing

  2️⃣ Increases spending

  3️⃣ Stimulates the economy
• The central bank aims to maintain price stability and full employment by manipulating monetary policy tools.


  True
• Increasing reserve requirements reduces the money banks can lend out.


  True
• Selling government bonds reduces the money supply and inflation.


  True
• A contractionary monetary policy reduces economic growth but slows inflation.


  True
• A key challenge of monetary policy is the significant time lag