Practice question · Match the pairs
Match each link of the transmission chain to its description.
- Policy rate
- Bank lending rates
- Aggregate demand
- Inflation
- Spending that responds to credit conditions
- The central bank’s price for lending to banks
- What firms and households actually pay
- The final target, reacting after long lags
Hints
- The chain runs from the policy rate outward to prices.
- Each link takes months, which is why policy steers by forecast.
Show the answer
- Policy rate → The central bank’s price for lending to banks
- Bank lending rates → What firms and households actually pay
- Aggregate demand → Spending that responds to credit conditions
- Inflation → The final target, reacting after long lags
Why
Policy rate → market rates → spending → prices: each arrow takes months, which is why policy steers by forecast.
Practise Monetary Policy
The app has 6 more questions on this lesson, and keeps your place in the course. Business I is free to start.
More questions on Monetary Policy
- Order the transmission of a rate cut from decision to prices.
- Sort each situation by the monetary policy it calls for.
- Why do central banks act on _forecasts_ of inflation rather than waiting for inflation to appear?
- A central bank cuts rates to zero and the economy still stagnates. Why does the tool lose its grip there?
- Which effects follow a central-bank rate _cut_, all else equal?
- Banks hold a 25% reserve ratio. Set the slider to the money multiplier.