Practice question · Select all that apply
Which effects follow a central-bank rate cut, all else equal?
Hints
- Cheaper credit encourages borrowing, spending and investment.
- The deposit multiplier depends on reserve behaviour, not the policy rate.
Show the answer
- A. Investment projects on the margin become viable
- B. Mortgages and business loans get cheaper
- C. Aggregate demand strengthens
Why
Cheaper credit feeds spending and investment. The multiplier depends on reserve behavior, not directly on the policy rate.
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.
- 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?
- Banks hold a 25% reserve ratio. Set the slider to the money multiplier.