Practice question · Put in order
Order the transmission of a rate cut from decision to prices.
- Banks cut loan and mortgage rates
- Central bank lowers the policy rate
- Aggregate demand and output rise
- Price pressures build with a long lag
- Households and firms borrow and spend more
Hints
- Credit conditions change before spending does.
- Prices are the last link, up to two years later.
Show the answer
- Central bank lowers the policy rate
- Banks cut loan and mortgage rates
- Households and firms borrow and spend more
- Aggregate demand and output rise
- Price pressures build with a long lag
Why
Decision → credit → spending → output → prices: each link adds months, so the chain’s far end arrives up to two years late.
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
- Sort each situation by the monetary policy it calls for.
- Match each link of the transmission chain to its description.
- 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.