Sample Quizzes For Preparation: Monetary Policy

AS Level Economics – Topic 5.3 Monetary Policy Quiz

Question 1: What is the primary aim of monetary policy?

A. To control government spending
B. To influence aggregate demand through fiscal decisions
C. To regulate interest rates and the money supply
D. To increase taxation revenue

Question 2: Which institution is responsible for setting interest rates in most countries?

A. Ministry of Finance
B. Central Bank
C. Stock Exchange
D. Commercial Banks

Question 3: What would most likely result from an expansionary monetary policy?

A. Increased inflationary pressure
B. Higher unemployment
C. Reduced consumption
D. Appreciation of the currency

Question 4: Which of the following is NOT a tool of monetary policy?

A. Fiscal surplus
B. Interest rates
C. Credit regulations
D. Money supply control

Question 5: If the central bank lowers the base interest rate, what effect would this have on aggregate demand?

A. It would decrease due to less saving
B. It would increase due to cheaper borrowing
C. It would remain unchanged
D. It would fall due to higher taxes

Question 6: What is meant by the ‘money supply’?

A. The total tax revenue available
B. The value of exports and imports
C. The total quantity of money in circulation in the economy
D. The amount of foreign exchange reserves

Question 7: What is the impact of a contractionary monetary policy on inflation?

A. It reduces inflation
B. It increases inflation
C. It has no effect on inflation
D. It only affects unemployment

Question 8: Which of the following is a credit regulation tool?

A. VAT adjustment
B. Capital expenditure limit
C. Loan-to-value ratio limit
D. Budget deficit ceiling

Question 9: Which of these policies would a central bank use to reduce inflation?

A. Increase interest rates
B. Lower taxes
C. Increase government spending
D. Print more money

Question 10: Which policy would best stimulate demand during a recession?

A. Raising interest rates
B. Reducing government spending
C. Increasing interest rates
D. Lowering interest rates

Question 11: What happens when the central bank buys government bonds in the open market?

A. Money supply contracts
B. Money supply expands
C. Government spending decreases
D. Taxes increase

Question 12: Which of the following is most likely to be affected by a change in the interest rate?

A. Export taxes
B. Income inequality
C. Household borrowing
D. Currency denomination

Question 13: What term describes a policy that increases interest rates and tightens credit?

A. Loose fiscal policy
B. Expansionary monetary policy
C. Contractionary monetary policy
D. Demand-side subsidy

Question 14: What does the AD/AS model show under expansionary monetary policy?

A. AD curve shifts to the left
B. AD curve remains unchanged
C. AD curve shifts to the right
D. AS curve becomes vertical

Question 15: Which policy is most likely to lead to appreciation of the domestic currency?

A. Lower interest rates
B. Higher government subsidies
C. Higher interest rates
D. Increase in import tariffs

Question 16: What is a potential risk of excessively expansionary monetary policy?

A. Deflation
B. Recession
C. Hyperinflation
D. Budget surplus

Question 17: How can monetary policy influence employment levels?

A. By printing more currency
B. By adjusting corporate tax rates
C. Through interest rate changes that affect investment
D. By regulating minimum wage

Question 18: Why might monetary policy fail during a liquidity trap?

A. Consumers stop borrowing due to high taxes
B. Interest rates are already too high
C. Interest rates are too low to stimulate demand
D. Banks increase reserve ratios

Question 19: Which of the following best defines credit regulation?

A. Managing exchange rates
B. Controlling the terms and availability of loans
C. Controlling capital flow to foreign markets
D. Adjusting fiscal incentives

Question 20: Which combination indicates contractionary monetary policy?

A. ↓ Interest Rates, ↑ Money Supply
B. ↑ Interest Rates, ↓ Money Supply
C. ↓ Interest Rates, ↑ Credit Limits
D. ↑ Government Spending, ↓ Taxation

Question 21: Which one of these is NOT typically impacted directly by monetary policy?

A. Consumption
B. Investment
C. Government spending
D. Exchange rates

Question 22: What effect does tightening credit regulations have on consumer spending?

A. Increases consumer spending
B. Reduces consumer spending
C. No change
D. Only affects investment spending

Question 23: Which macroeconomic objective is most directly targeted by contractionary monetary policy?

A. Reducing unemployment
B. Reducing inflation
C. Increasing exports
D. Reducing budget deficit

Question 24: What would be a signal to tighten monetary policy?

A. Low inflation and high unemployment
B. High inflation and fast GDP growth
C. Rising budget deficit
D. Currency depreciation

Question 25: Which of the following would be used in an expansionary policy mix?

A. Lower base rate, increase in credit supply
B. Raise interest rates and reduce bond purchases
C. Cut public investment
D. Reduce the money supply

Question 26: What does a downward movement of the AD curve show?

A. A decrease in inflation
B. A decrease in aggregate demand
C. An increase in supply
D. An improvement in employment

Question 27: How is employment affected in the short run by a successful expansionary monetary policy?

A. It decreases
B. It remains constant
C. It increases
D. It becomes unpredictable

Question 28: What is a central bank’s first action in a deflationary period?

A. Increase tax rate
B. Cut interest rate
C. Decrease credit availability
D. Sell government bonds

Question 29: What is the typical transmission mechanism of monetary policy?

A. Fiscal stimulus → AD shift
B. Tax policy → Price control
C. Interest rate → Consumption → AD
D. Minimum wage → Employment

Question 30: Why might a rise in interest rates not reduce inflation effectively?

A. Currency is too strong
B. Government spending is too low
C. Investment is already at zero
D. Consumption is interest inelastic

Answer Key and Explanations

1. C – Monetary policy regulates interest rates and money supply
2. B – The central bank controls monetary policy
3. A – Expansionary policy boosts demand, risking inflation
4. A – Fiscal surplus is a fiscal policy tool
5. B – Lower interest → cheaper loans → ↑AD
6. C – Total money in circulation = money supply
7. A – Contractionary policy aims to reduce inflation
8. C – Loan-to-value ratios are a form of credit regulation
9. A – Higher rates help reduce inflation
10. D – Lower rates stimulate borrowing and demand
11. B – Buying bonds injects money into the economy
12. C – Borrowing is interest-sensitive
13. C – Higher interest and tighter credit = contractionary
14. C – AD increases due to expansionary policy
15. C – Higher rates attract foreign capital → appreciation
16. C – Too much stimulation = hyperinflation
17. C – Investment is influenced by borrowing cost
18. C – When rates are already low, further cuts are useless
19. B – Credit regulation = loan control
20. B – Higher rates + lower money supply = contractionary
21. C – Gov’t spending is fiscal policy
22. B – Harder credit = less spending
23. B – Contractionary policy reduces inflation
24. B – Overheating economy signals need to tighten
25. A – Expansionary = lower rates + more credit
26. B – Movement down = fall in AD
27. C – Demand rise → employment increase
28. B – Rate cut to stimulate demand
29. C – Standard chain: IR → consumption → AD
30. D – If consumption is insensitive to rate change, inflation remains