Monetary Policy Using a variety of techniques to influence the use of money and credit within an economy in order to meet certain objectives. Here on MCQs.club we have prepared Multiple Choice Questions (MCQs) on economics monetary policy that fully cover the monetary policy definition, monetary policy definition economics, contractionary fiscal policy examples. Our these MCQs on modern monetary policy and fiscal policy are useful for Professional exams, Competitive exams, Business management exams.

Which of the following is correct for “Interest Rate”?

1. Interest rate is the amount charged by a lender to a borrower on the principal borrowed.
2. Interest rates are expressed as a percentage of principal.
3. It is typically recorded on per annum basis.
4. All of the above

Types of interest rates include:

1. Nominal
2. Real
3. Both A&B
4. None

Nominal interest rate –

1. It is the simplest interest rate. It is the stated coupon rate or the stated interest rate.
2. It is inflation adjusted. It is so named because it states the real rate that the lender would receive after it has been adjusted for the inflation.
3. Both A&B
4. None

Real interest rate –

1. It is the simplest interest rate. It is the stated coupon rate or the stated interest rate.
2. It is inflation adjusted.
3. It is so named because it states the real rate that the lender would receive after it has been adjusted for the inflation.
4. Both B&C only

Identify which of the following is correct for Determination of interest rate?

1. An increase in demand would lead to an increase in the rate of interest whereas a decrease in demand would lead to a decrease in the rate of interest.
2. With the rise in actual or expected inflation rate, a rise in the interest rate too takes place.
3. The government has a say in the determination of the interest rates by way of devising the monetary policy.
4. All of the above

The interest rate on different type of loans depends on multiple factors including:

1. Credit risk
2. Time
3. Tax considerations
4. All of the above

Monetary union (or currency union) –

1. Where two or more states share the same currency. They operate under the same central bank.
2. The entity responsible for overseeing the overall monetary policy in a country.
3. It is concerned with meeting a number of objectives such as: currency stability, low inflation and full employment.
4. All of the above

Central bank –

1. The entity responsible for overseeing the overall monetary policy in a country.
2. It is concerned with meeting a number of objectives such as: currency stability, low inflation and full employment.
3. Both A&B
4. None

Functions of the central bank might include:

1. 1. Sole supplier of currency
  2. Banker to the government
  3. Banker to the banks
  4. Lender of last resort
  5. Exchange rate controls
  6. Clearing agent
  7. Establish specialised banks

1. All of the above
2. (I) (II) and (V) only
3. (I) (III) and (VII) only
4. None

Which of the following is correct for Monetary Policy?

1. Using a variety of techniques to influence the use of money and credit within an economy in order to meet certain objectives.
2. Monetary policy is based around controlling the growth and size of the money supply, in turn affecting the interest rate that is set in the economy.
3. Both A&B
4. None

Suppose the central bank is looking to reduce the level of aggregate demand in an economy. What it might do to do so?

1. It can do so through manipulating the reserves that commercial banks must hold.
2. Raise interest rate – interest rates rise for mortgage borrowers and firms looking for investment are discouraged from borrowing, and spending more money.
3. Making tight money – The effect of tight money reduces the level of aggregate demand, causing a drop-in output, employment and inflation.
4. All of the above

Which of the following is correct for Discount-rate policy?

1. The central bank can encourage more borrowing by lowering the discount rate that it offers to commercial banks, as a means to induce them into borrowing more.
2. The discount rate is used as a proxy against which banks offer interest rates to individuals in the economy.
3. Both A&B
4. None

There are numerous objectives that monetary policy looks to achieve including:

1. 1. Price stability
  2. Economic growth
  3. Exchange rate stability
  4. Full employment
  5. Credit control

1. All of the above
2. (II) and (IV) only
3. (I) and (V) only
4. None

All of the following are correct EXCEPT:

1. By undertaking monetary policy to increase full employment, a central bank could undertake policies to increase aggregate demand. Doing so could drive up inflation, putting more pressure on the price stability target
2. In order to boost economic growth, a central bank may decide to manipulate exchange rates to increase the likelihood of exports. Doing so would jeopardise stability in exchange rates.
3. A way to grow the economy might be through the expansion of credit, as it would spur investment and spending. However, this comes with heightened economic risk of credit defaulting.
4. None

Limitations of monetary policy include:

1. Existence of non-monetary sector
2. Existence of non-banking financial institutions
3. High liquidity in financial markets
4. Lack of co-ordination between monetary and fiscal policies
5. All of the above

Which of the following is true for “Bank”?

1. Banks act as financial intermediaries
2. A financial institute licensed by the government to receive deposits, which then invests these funds in a number of securities.
3. Both A&B
4. None

Types of bank include:

1. Commercial bank and Investment bank
2. Retail bank and Specialized bank
3. Cooperative bank/ building society/ credit union
4. All of the above

Commercial bank –

1. These banks receive money from the public through deposits, and other means, and in return finance the business sector and individuals.
2. A bank targeted at the mass-market in which individual customers can purchase bank services: mortgages, checking accounts, personal loans, and other bank services.
3. These banks can be run by both the public and private sector.
4. All of the above

Specialized bank –

1. A bank targeted to a specific section of the economy in which firms and customers can have access to specialized forms of banking services.
2. They will often have specialized needs that might not be adequately met by other forms of banks.
3. Both A&B
4. None

Cooperative bank/ building society/ credit union – These are usually a not-for-profit organisation where members pool their resources and receive favourable credit terms.

1. True
2. False

Investment bank –

1. A financial intermediary that undertakes a number of financial services for clients.
2. An investment bank works by assisting a range of institutions with raising capital by underwriting their securities and other assets
3. The investment bank aid companies with acquiring funds, and facilitate a number of transactions through utilising the financial markets.
4. All of the above

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