Central Bank Functions and Monetary Policy
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Questions and Answers

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?

    <p>Bond Market Vigilantes</p> Signup and view all the answers

    What can lead to a decrement in bond prices?

    <p>A rise in interest rates.</p> Signup and view all the answers

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

    <p>Because they lack the capacity to control the deposits households and corporations make.</p> Signup and view all the answers

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

    <p>To ensure price stability and economic growth</p> Signup and view all the answers

    What is one way central banks control the money supply?

    <p>By setting official interest rates</p> Signup and view all the answers

    What is a key responsibility of central banks concerning currencies?

    <p>Owning and controlling official reserves</p> Signup and view all the answers

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

    <p>Overseeing the inter-bank market</p> Signup and view all the answers

    Why do central banks inject liquidity into the economy?

    <p>So economic agents can use it in their transactions</p> Signup and view all the answers

    What is a central bank responsible for managing?

    <p>The currency of a country or group of countries</p> Signup and view all the answers

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

    <p>Guaranteed public bonds</p> Signup and view all the answers

    What is the primary goal of monetary policy?

    <p>To control the overall money supply</p> Signup and view all the answers

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

    <p>Stimulating the economy beyond a certain point</p> Signup and view all the answers

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

    <p>Due to excess reserves</p> Signup and view all the answers

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

    <p>Revising interest rates</p> Signup and view all the answers

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

    <p>Advisory role</p> Signup and view all the answers

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