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Instruments of Monetary Policy and Quantitative Easing

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Questions and Answers

What is the primary purpose of quantitative easing?

To increase interest rates and encourage saving
To influence the exchange rate by buying or selling currency
To stimulate the economy by increasing the money supply (correct)
To reduce the minimum balance requirements for banks

How does raising interest rates affect consumer spending?

It encourages consumers to save more and spend less (correct)
It makes it more expensive for consumers to borrow, leading them to spend less
It encourages consumers to borrow more and spend more
It has no impact on consumer spending

What is the main goal of monetary policy in terms of inflation?

To control and keep inflation low in order to provide greater economic certainty (correct)
To use inflation as a tool to influence the exchange rate and international competitiveness
To maintain a high rate of inflation to stimulate economic growth
To allow inflation to rise and fall freely without any intervention

What is a deflationary gap?

A situation where aggregate demand is lower than aggregate supply, leading to unemployment (D) Signup and view all the answers

How does a weaker currency affect the price of imported goods?

It makes imported goods more expensive for domestic consumers (D) Signup and view all the answers

What is the relationship between the money supply and inflation?

Increasing the money supply can lead to higher inflation, but it depends on other economic factors (C) Signup and view all the answers

What is the main objective of monetary policy in the UK in recent years?

Reducing the rate of inflation (B) Signup and view all the answers

According to monetarist economists, what is considered an important intermediate target of economic policy?

Growth in the money supply (B) Signup and view all the answers

How do monetarist economists believe an increase in the money supply will affect prices and incomes?

Raise prices and incomes (B) Signup and view all the answers

Which economic concept is primarily targeted by the use of monetary policy?

Deflationary pressure reduction (B) Signup and view all the answers

What is the purpose of setting intermediate objectives for monetary policy?

Work towards ultimate economic objectives (C) Signup and view all the answers

What is the term used to describe the total demand in the economy for goods and services?

Aggregate demand (A) Signup and view all the answers

How do poll taxes generally affect low-income individuals compared to high-income individuals?

Negatively impact low-income individuals (B) Signup and view all the answers

Which of the following is a component of aggregate demand?

Government spending (C) Signup and view all the answers

What does the aggregate supply refer to in an economy?

Ability to produce goods and services (D) Signup and view all the answers

Which formula can be used to calculate aggregate demand?

$AD = C + I + G + (X – M)$ (C) Signup and view all the answers

Which term represents the use of government spending and tax policies to influence the level of demand in an economy?

Fiscal policy (C) Signup and view all the answers

What does AD stand for in the context of calculating aggregate demand?

Aggregate Demand (D) Signup and view all the answers

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