Monetary Policy and Currency Exchange Rates

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Questions and Answers

What is the primary purpose of fiscal policy?

To control international trade

To establish monetary supply

To regulate the banking sector

To influence macroeconomic conditions (correct)

During a recession, what fiscal action might a government take?

Cut infrastructure spending

Lower tax rates (correct)

Reduce government employment

Increase interest rates

Which type of fiscal policy is implemented to combat inflation?

Inflationary fiscal policy

Deflationary fiscal policy

Expansionary fiscal policy

Contractionary fiscal policy (correct)

What are the two main types of fiscal policy?

Expansionary and contractionary Signup and view all the answers

What is one of the main objectives of fiscal policy?

To maintain the growth rate of the economy Signup and view all the answers

How does expansionary fiscal policy promote economic activity?

By increasing government spending Signup and view all the answers

Which of the following actions is characteristic of contractionary fiscal policy?

Reduction in government expenditures Signup and view all the answers

What effect does decreasing taxes generally have in fiscal policy?

It stimulates consumer spending Signup and view all the answers

What is the primary effect of expansionary monetary policy on employment?

It decreases unemployment. Signup and view all the answers

What characterizes a budget surplus?

Revenues exceed expenditures. Signup and view all the answers

What does contractionary monetary policy aim to achieve?

Slow down economic activity. Signup and view all the answers

How does expansionary monetary policy typically affect interest rates?

It decreases interest rates. Signup and view all the answers

How is a budget deficit defined?

When expenses exceed revenues. Signup and view all the answers

Which of the following is NOT an instrument of monetary policy used by central banks?

Taxation adjustments Signup and view all the answers

What is the difference between government deficit and government debt?

Deficit is the difference between revenue and spending, whereas debt is accumulated over time. Signup and view all the answers

What typically contributes to the national debt of a government?

Accrued government deficits. Signup and view all the answers

What is the result of increasing the money supply on domestic currency's exchange rates?

The domestic currency becomes cheaper. Signup and view all the answers

What percentage of total public debt in Bangladesh is made up of domestic debt?

60.73% Signup and view all the answers

During a recession, how does expansionary monetary policy primarily affect saving behavior?

It discourages saving. Signup and view all the answers

In the context of monetary policy, what does the term 'reserve requirement' refer to?

The minimum reserves each bank must hold to customer deposits. Signup and view all the answers

What does a government budget surplus indicate about its financial management?

Effective operation and regulation. Signup and view all the answers

Which of the following is a consequence of a contractionary monetary policy?

Decreased inflation rates. Signup and view all the answers

What is the equivalent amount of public sector net debt per person in the UK for the financial year ending 2023/24?

£37,900 Signup and view all the answers

What happens to government debt when there is a persistent budget deficit?

It increases as the government borrows more. Signup and view all the answers

What is the primary purpose of a budget?

To estimate future revenue and expenses Signup and view all the answers

Which type of budget indicates that total revenues are less than total expenditures?

Deficit budget Signup and view all the answers

When must a budget be prepared in relation to its effective period?

Before the time for which it is required Signup and view all the answers

What is a common feature of budgets as described in the content?

They should align with organizational policies Signup and view all the answers

What does a balanced budget signify?

Total revenues are equivalent to or greater than expenditures Signup and view all the answers

Which of the following is not a type of budget classified in the content?

Fixed budget Signup and view all the answers

Why is ongoing budgeting important for households and corporations?

It allows for continuous evaluation and adjustment of financial strategies Signup and view all the answers

The fiscal balance is specifically the relationship between what two financial elements?

Government revenues and spending Signup and view all the answers

What is the primary goal of both fiscal and monetary policy?

To create an economic environment with stable growth and low inflation Signup and view all the answers

Which entity is responsible for setting monetary policy?

The central bank Signup and view all the answers

What typically happens when the economy grows above a certain rate?

Inflation and asset bubbles may occur Signup and view all the answers

How does fiscal policy primarily influence the economy?

By determining tax rates and government spending Signup and view all the answers

What is a possible negative consequence of contractionary fiscal policies?

Increased unemployment rates Signup and view all the answers

In what way do monetary and fiscal policies share similarities?

Both regulate economic activity over time Signup and view all the answers

Which of the following accurately describes fiscal policy?

Implemented by the government regarding taxation and expenditure Signup and view all the answers

What is one of the key responsibilities of the Bangladesh Bank related to monetary policy?

Ensuring stable economic growth and price stability Signup and view all the answers

Study Notes

Monetary Policy

Expansionary monetary policy decreases unemployment by increasing money supply, stimulating business activity.
Central banks regulate currency exchange rates, influencing the value of domestic currencies against foreign ones.
Expansionary monetary policy aims to boost economic activity through increased money supply and lower interest rates.
Contractionary monetary policy is designed to slow down economic activity, reducing money supply and increasing interest rates.

Instruments of Monetary Policy

Central banking uses various instruments to manage the economy, including:
- Reserve Requirement
- Open Market Operations
- Interest Rates
- Selective Credit Control

Fiscal Policy

Fiscal policy employs government spending and tax policies to influence macroeconomic factors like aggregate demand, employment, inflation, and growth.
During recessions, government may lower taxes or increase spending to stimulate demand.
To curb inflation, the government may raise taxes or cut spending to stabilize the economy.

Objectives of Fiscal Policy

Maintain sustainable economic growth.
Stabilize price levels.
Encourage overall economic development.
Ensure equilibrium in the balance of payments.

Types of Fiscal Policy

Expansionary fiscal policy increases government spending and/or lowers taxes to boost economic activity during downturns.
Contractionary fiscal policy raises taxes or reduces spending to slow economic growth when inflation is high.

Fiscal Policy vs. Monetary Policy

Fiscal policy influences aggregate demand through taxation and spending by government, while monetary policy controls money supply and credit availability through central banks.
Examples include the Bangladesh Bank for monetary policy and the Government of Bangladesh for fiscal policy.
Both policies aim for a stable economic environment, addressing periods of growth and downturns.

Similarities between Fiscal and Monetary Policy

Both policies regulate economic activity to promote stability and avoid severe fluctuations.
Aim to create a predictable economic climate that encourages consumer confidence and investment decisions.

Budget

A budget is an estimation of revenue and expenses for a specific timeframe, typically reviewed regularly.
Budgets can be applied to individuals, families, governments, and organizations, classified as:
- Balanced Budget
- Surplus Budget
- Deficit Budget

Features of Budget

Must be quantitative and prepared before the budget period, reflecting organizational objectives.
Evaluated periodically to ensure it aligns with business goals.

Budget Deficit and Surplus

A balanced budget occurs when total revenues equal or exceed total expenditures.
A fiscal deficit indicates government spending surpasses revenue, while a surplus occurs when revenue exceeds spending.
Surplus budgets usually regard effective financial operation, while deficit budgets reflect a potential financial shortfall.

Government Debt and Deficits

Difference between deficit (annual difference in revenue vs. spending) and debt (total liabilities over time).
For example, UK's public sector net debt was £2.69 trillion at the end of 2023/24.
In Bangladesh, total public debt stood at US$ 155.71 billion at FY22, with a breakdown of domestic (60.73%) and external (39.27%).

Understanding Recession

Recognizes economic downturns marked by reduced demand, employment, and GDP.

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Description

Explore the effects of expansionary monetary policy on unemployment and the role of central banks in regulating currency exchange rates. This quiz delves into how changes in the money supply impact business activities and currency valuation. Test your understanding of these key economic concepts.