15 questions · 15 marks · ≈ 15 min
The table shows possible sequences between the rate of interest and other economic variables. Which sequence is the most likely?
| interest rate | borrowing | investment | GDP | |
|---|---|---|---|---|
| A B C D | higher higher lower lower | decrease increase decrease increase | increase decrease decrease increase | increase decrease decrease increase |
Choose your answer
What is the most likely result of an increase in interest rates?
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a fall in consumer spending
a fall in productivity
a rise in borrowing
a rise in investment
In recent years some central banks have reduced interest rates below 1% per year. What is the purpose of this monetary policy?
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to discourage lending by the commercial banks
to encourage investment to stimulate the economy
to increase individual savings
to reduce inflation
Which statement about interest rate changes is accurate?
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A fall in interest rates will always increase inflation.
A rise in interest rates may increase cost-push inflation.
A rise in interest rates will raise the level of investment in a country.
Interest rate changes have no impact on the level of production.
What can a central bank increase in order to reduce consumer borrowing?
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commercial bank deposits
government spending
the exchange rate
the rate of interest
What is an example of expansionary monetary policy?
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a decrease in income tax rates
a decrease in the budget deficit
a decrease in the money supply
a decrease in the rate of interest
What best describes a 'bond'?
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The price of one currency in terms of another
When the central bank creates new money & uses it to buy open-market assets
Currency and other liquid assets held by the central bank to settle payments
The government borrows money from private firms/individuals and promises to pay it back in the future with interest
What is a monetary policy measure?
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increasing interest rates
increasing taxation
reducing the power of trade unions
selling state-owned enterprises
What is the most likely effect of a government reducing the money supply?
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Employment will decrease.
Growth will increase.
Inflation will increase.
Tax rates will decrease.
How does a central bank use quantitative easing as part of its monetary policy?
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By decreasing the money supply through open market sales
By raising interest rates to control inflation
By purchasing financial assets to increase the money supply
By reducing government spending to stimulate the economy
Which government policy would reduce economic growth?
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cutting the rate of corporation tax
increasing expenditure on education
lowering the rate of income tax
raising interest rates
What is likely to assist a government’s policy of reducing inflation?
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allowing businesses to borrow money for longer periods
encouraging the public to spend more money
increasing lending to members of the public
raising the interest rate on credit card borrowing
What is a main motivation for investors engaging in hot money flows?
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Long-term economic growth
Stable and predictable returns
Supporting local businesses
Speculative short-term gains
The government uses monetary policy and reduces the interest rate.
What might be a consequence of this?
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a decrease in the rate of inflation
an increase in the level of investment
an increase in the level of savings
an increase in unemployment
Which of the following is not a strength of monetary policy?
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The Bank of England is independent from the government
It only considers a short term outlook
It targets inflation & maintains stable prices
Depreciating the currency can increase exports