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Limitations of Monetary Policy

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Questions and Answers

What can cause the economy to over or underreact to central bank policies?

Uncertainty about the effect of a policy (correct)
The central bank's ability to control commercial bank deposits
Government's reduction of the money supply
Economists' disagreement on policy

What happens to bond prices when interest rates rise?

They become unpredictable
They increase
They decrease (correct)
They remain the same

What is a liquidity trap characterized by?

High interest rates and high savings rates
Low interest rates and low savings rates
High interest rates and low savings rates
Low interest rates and high savings rates (correct)

What can make an expansionary monetary policy ineffective?

Government's reduction of the money supply (A) Signup and view all the answers

What is the role of bond market vigilantes?

To decrease the demand for long-term bonds (B) Signup and view all the answers

What is a limitation of monetary policy according to the text?

Uncertainty about the effect of a policy (A) Signup and view all the answers

Why do consumers choose to avoid purchasing treasury securities in a liquidity trap?

Because they expect interest rates to soon rise (C) Signup and view all the answers

What can central banks not control according to the text?

Commercial bank deposits (A) Signup and view all the answers

What is the result of bond market vigilantes reducing their demand for long-term bonds?

An increase in bond yields (C) Signup and view all the answers

Why might an expansionary monetary policy not always work?

Because of uncertainty about the effect of a policy (B) Signup and view all the answers