Monetary and Fiscal Policy Flashcards
7 cards from real CEA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Monetary and Fiscal Policy flashcards as text
The money multiplier in a fractional reserve banking system is calculated as:
Answer: 1 divided by the reserve ratio
The simple money multiplier equals 1/reserve ratio, showing how much the money supply can expand for each dollar of base money injected into the banking system.
Which fiscal policy tool is considered an automatic stabilizer?
Answer: Progressive income taxes and unemployment insurance
Progressive income taxes and unemployment insurance automatically shrink during expansions and expand during recessions without legislative action, stabilizing the economy.
Quantitative easing (QE) differs from traditional monetary policy primarily because it:
Answer: Involves purchasing longer-term assets to inject liquidity beyond the zero lower bound
QE involves large-scale purchases of longer-term securities to lower long-term rates and inject liquidity when conventional rate cuts are constrained by the zero lower bound.
Under a fixed exchange rate regime, a country's monetary policy is most constrained because:
Answer: The central bank must prioritize exchange rate stability over domestic goals
With a fixed exchange rate, the central bank must adjust monetary policy to maintain the peg, sacrificing independence over domestic objectives like inflation or employment.
Which scenario best illustrates 'fiscal dominance'?
Answer: Government borrowing needs force the central bank to monetize deficits
Fiscal dominance occurs when large government deficits pressure the central bank to create money to finance debt, undermining its anti-inflation mandate.
The Ricardian Equivalence hypothesis suggests that deficit-financed tax cuts:
Answer: Have no effect on aggregate demand because consumers save the tax cut to pay future taxes
Ricardian Equivalence holds that rational consumers anticipate future tax increases to repay debt and therefore save rather than spend current tax cuts, neutralizing fiscal stimulus.
Which of the following would shift the LM curve to the right?
Answer: An increase in the nominal money supply
An increase in the nominal money supply shifts the LM curve rightward, lowering interest rates at each income level and stimulating economic activity.