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Questions and Answers
The central bank increases the money supply to combat inflation.
The central bank increases the money supply to combat inflation.
False (B)
A higher discount rate makes borrowing more expensive for banks.
A higher discount rate makes borrowing more expensive for banks.
True (A)
Increasing the bank legal reserve rate allows banks to lend more money.
Increasing the bank legal reserve rate allows banks to lend more money.
False (B)
Buying government debt securities is a method of restrictive monetary policy.
Buying government debt securities is a method of restrictive monetary policy.
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Deflation occurs when there is a decline in spending during an economic crisis.
Deflation occurs when there is a decline in spending during an economic crisis.
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Open market operations involve the central bank buying and selling government debt securities.
Open market operations involve the central bank buying and selling government debt securities.
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Restrictive monetary policy aims to increase the money supply in the economy.
Restrictive monetary policy aims to increase the money supply in the economy.
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Lowering the reserve rate enables banks to lend and invest more money.
Lowering the reserve rate enables banks to lend and invest more money.
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Study Notes
Monetary Policy and its Instruments
- Central banks control the money supply, a key function of monetary policy.
- Monetary policy aims to control inflation and counteract deflation.
- Inflation occurs when economic growth leads to increased spending.
- Deflation happens when decreased spending occurs during economic downturns.
- Monetary policy has expansionary and restrictive types.
- Expansionary policy increases the money supply.
- Restrictive policy decreases the money supply.
- Monetary policy uses tools like interest rates and reserve requirements.
Central Bank's Instruments for Monetary Policy
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Discount Rate: The interest rate on loans from the central bank to commercial banks.
- Increasing the discount rate makes borrowing costlier, decreasing lending and money supply.
- Lowering the discount rate makes borrowing cheaper, increasing lending and money supply.
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Bank Legal Reserve/Cash Ratio: The percentage of deposits banks must keep as reserves, unavailable for lending.
- Reducing the reserve rate increases lending and money supply.
- Increasing the reserve rate decreases lending and money supply.
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Open Market Operations: Buying or selling government securities.
- Selling securities removes money from circulation, decreasing the money supply.
- Buying securities injects money into the economy, increasing the money supply.
Summary of Monetary Policy Instruments
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Expansionary Monetary Policy (Increase Money Supply):
- Reduce the discount rate.
- Reduce the legal reserve/cash ratio.
- Buy government securities.
-
Restrictive Monetary Policy (Decrease Money Supply):
- Increase the discount rate.
- Increase the legal reserve/cash ratio.
- Sell government securities.
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Description
Explore the essential concepts of monetary policy, including the central bank's role and its instruments. This quiz covers various monetary policy goals such as tackling inflation and combating deflation, as well as the types of monetary policies employed by central banks.
