Cambridge IGCSE · Economics (0455)

Monetary policy: Practice Questions

5 multiple-choice questions marked as you go, and 5 written questions with worked solutions. All on Monetary policy.

10 questions25 marksFree, no account

Question 1

1 mark

Which measure is an example of monetary policy?

Question 2

1 mark

A country experiences high demand-pull inflation. Which combination of monetary policy actions is most likely to reduce this inflationary pressure?

Question 3

1 mark

The central bank of a country increases the base interest rate to reduce the rate of inflation. What is the most likely effect of this action on the country's exchange rate and its volume of exports?

Question 4

1 mark

What is a direct consequence of a central bank reducing the base interest rate?

Question 5

1 mark

Which instrument is a central bank most likely to use if it wants to implement contractionary monetary policy quickly without altering its benchmark interest rate?

Question 6

2 marks

Define monetary policy and identify one tool used by a central bank to implement it.

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Question 7

4 marks

Explain how a reduction in the central bank's interest rate affects the rate of inflation in an economy.

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Question 8

6 marks

Explain the transmission mechanism by which an increase in the money supply by the central bank can lead to an increase in aggregate demand through the effect on interest rates.

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Question 9

4 marks

A country's central bank decides to change its policy to influence the level of economic activity.

(a) State the definition of the money supply. [2]
(b) Identify two monetary policy instruments, other than changing the money supply itself, that a central bank can use to influence the economy. [2]

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Question 10

4 marks

(a) Define monetary policy.
(b) Identify two macroeconomic aims that a government might hope to achieve by implementing an expansionary monetary policy.

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