10 Questions
What is the primary objective of monetary policy?
All of the above
The discount rate is the interest rate at which individuals borrow from commercial banks.
False
What are the three main functions of money?
medium of exchange, store of value, and unit of account
Match the following types of money with their characteristics:
Commodity-Based Money = Backed by a valuable commodity Fiat Money = Having no intrinsic value, but backed by government decree Representative Money = Backed by a commodity, but can be exchanged for a different commodity
Money should be _______________________ to withstand wear and tear.
durable
Which of the following is a tool of monetary policy?
All of the above
The central bank can increase the money supply by selling government securities.
False
What is the objective of price stability in monetary policy?
keeping inflation low and stable
The central bank sets the _______________________ rate to influence the cost of borrowing.
discount
Match the following characteristics of money with their descriptions:
Durability = Withstanding wear and tear Portability = Easy to transport Divisibility = Divisible into smaller units
Study Notes
Monetary Policy
- monetary policy is controlled by a central bank to promote economic growth, stability, and low inflation.
- the central bank uses three main tools to implement monetary policy:
- Open Market Operations (OMO): buying or selling government securities to increase or decrease the money supply.
- Reserve Requirements: setting the minimum amount of reserves commercial banks must hold, affecting the amount of credit available.
- Discount Rate: the interest rate at which banks borrow from the central bank, influencing the cost of borrowing.
- the objectives of monetary policy are:
- Price Stability: keeping inflation low and stable.
- Maximum Employment: promoting job growth and low unemployment.
- Moderate Long-Term Interest Rates: maintaining stable and low interest rates.
Money
- money serves as a medium of exchange, store of value, and unit of account.
- functions of money:
- Medium of Exchange: facilitating transactions by providing a common medium of exchange.
- Store of Value: allowing individuals to save for the future.
- Unit of Account: providing a standard unit for measuring the value of goods and services.
- types of money:
- Commodity-Based Money: backed by a valuable commodity, such as gold or silver.
- Fiat Money: having no intrinsic value, but backed by government decree.
- Representative Money: backed by a commodity, but can be exchanged for a different commodity.
- characteristics of effective money:
- Durability: money should be able to withstand wear and tear.
- Portability: money should be easy to transport.
- Divisibility: money should be divisible into smaller units.
- Uniformity: money should be consistent in quality and value.
- Limited Supply: money supply should be controlled to prevent inflation.
- Acceptability: money should be widely accepted as a medium of exchange.
This quiz covers the definition and tools of monetary policy, including open market operations, reserve requirements, and discount rates. Test your knowledge of how central banks promote economic growth, stability, and low inflation.
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