Practice question · Sort into groups
Sort each situation by the monetary policy it calls for.
Groups: Cut rates (expansionary) · Raise rates (restrictive)
- Inflation at 8% and accelerating
- Deflation: prices falling, spending frozen
- A credit-fueled housing bubble inflating fast
- Unemployment surging, firms postponing investment
- Deep recession, inflation near zero
Hints
- Treat it as a thermostat: cool the overheating, warm the slump.
- Deflation and asset bubbles call for opposite responses.
Show the answer
Cut rates (expansionary): Deep recession, inflation near zero, Unemployment surging, firms postponing investment, Deflation: prices falling, spending frozen
Raise rates (restrictive): Inflation at 8% and accelerating, A credit-fueled housing bubble inflating fast
Why
The thermostat rule: too cold (recession, deflation) → cheaper money; too hot (inflation, bubbles) → dearer money.
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.
- 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.