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 'time inconsistency' problem in monetary policy refers to:
Answer: The incentive for central banks to renege on low-inflation commitments to boost output
Time inconsistency describes how a central bank that committed to low inflation may later find it optimal to allow higher inflation to reduce unemployment, undermining credibility.
Which of the following best defines 'seigniorage'?
Answer: Revenue the government earns from issuing currency at low production cost
Seigniorage is the profit the government earns by issuing currency whose face value exceeds its production cost, effectively a revenue source from money creation.
In the IS-LM framework, expansionary fiscal policy in a liquidity trap has:
Answer: Maximum effect because monetary policy cannot crowd out fiscal stimulus
In a liquidity trap the LM curve is flat, so IS curve shifts from fiscal expansion raise output without raising interest rates, eliminating crowding out.
Which metric best captures whether fiscal policy is expansionary or contractionary independent of automatic stabilizers?
Answer: The cyclically adjusted (structural) budget deficit
The cyclically adjusted deficit removes automatic stabilizer effects, isolating discretionary fiscal policy changes that reflect active government policy choices.
The 'portfolio balance channel' of QE suggests that asset purchases stimulate the economy by:
Answer: Pushing investors into riskier assets by reducing returns on safe assets purchased
By purchasing safe assets like Treasuries, QE reduces their yields and induces investors to rebalance into riskier assets like corporate bonds and equities, easing financial conditions.
A country running persistent twin deficits (budget and current account) is most at risk from:
Answer: Sudden capital flow reversals if foreign investor confidence deteriorates
Twin deficit countries rely heavily on foreign capital inflows; if confidence falters, sudden stops or reversals can trigger currency crises and financial instability.
Which of the following policy combinations would most effectively reduce inflation without causing a severe recession?
Answer: Gradual monetary tightening combined with credible central bank inflation targets
Gradual, credible monetary tightening anchors inflation expectations and reduces the sacrifice ratio, lowering inflation at a smaller cost to employment and output.