Central Bank Functions and Monetary Policy

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What is a major challenge when implementing monetary policy?

Central banks have complete control over the money supply.

All economists agree on the policies central banks should use.

Monetary policy is always effective in manipulating the supply of money.

Uncertainty about the effect of a policy puts the economy and prices on a complicated path. (correct)

What occurs when interest rates are close to zero and savings rates are high?

Monetary policy becomes more effective.

Government reduces the money supply.

A liquidity trap occurs. (correct)

Consumers invest heavily in treasury securities.

Why might an expansionary monetary policy be ineffective?

When consumers expect high future inflation.

When central banks have complete control over the money supply.

When government reduces the money supply. (correct)

When interest rates are high.

What is the term for individuals who participate in the bond market and reduce their demand for long-term bonds?

Bond Market Vigilantes (D) Signup and view all the answers

What can lead to a decrement in bond prices?

A rise in interest rates. (D) Signup and view all the answers

Why do central banks lack capacity to control the deposits households and corporations make in commercial banks?

Because they lack the capacity to control the deposits households and corporations make. (A) Signup and view all the answers

What is the primary objective of a central bank in setting monetary policy?

To ensure price stability and economic growth (C) Signup and view all the answers

What is one way central banks control the money supply?

By setting official interest rates (A) Signup and view all the answers

What is a key responsibility of central banks concerning currencies?

Owning and controlling official reserves (A) Signup and view all the answers

What is another function of central banks besides implementing monetary policy?

Overseeing the inter-bank market (D) Signup and view all the answers

Why do central banks inject liquidity into the economy?

So economic agents can use it in their transactions (A) Signup and view all the answers

What is a central bank responsible for managing?

The currency of a country or group of countries (A) Signup and view all the answers

What can commercial banks receive from central banks in exchange for collateral?

Guaranteed public bonds (A) Signup and view all the answers

What is the primary goal of monetary policy?

To control the overall money supply (D) Signup and view all the answers

What is a challenge that central banks face during deflationary periods?

Stimulating the economy beyond a certain point (A) Signup and view all the answers

Central Bank Functions and Monetary Policy

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Questions and Answers

What is a major challenge when implementing monetary policy?

What occurs when interest rates are close to zero and savings rates are high?

Why might an expansionary monetary policy be ineffective?

What is the term for individuals who participate in the bond market and reduce their demand for long-term bonds?

What can lead to a decrement in bond prices?

Why do central banks lack capacity to control the deposits households and corporations make in commercial banks?

What is the primary objective of a central bank in setting monetary policy?

What is one way central banks control the money supply?

What is a key responsibility of central banks concerning currencies?

What is another function of central banks besides implementing monetary policy?

Why do central banks inject liquidity into the economy?

What is a central bank responsible for managing?

What can commercial banks receive from central banks in exchange for collateral?

What is the primary goal of monetary policy?

What is a challenge that central banks face during deflationary periods?

Why might banks decrease the money they lend, even when the money supply rises?

What is a strategy that central banks use to promote economic growth?

What role do central banks play in addition to their monetary policy roles?

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