MonPol Unit 4 FINALS

What Monetary policy strategy controls Inflation & maintains price stability?

What monetary policy strategy promotes economic growth and reduces unemployment?

S1: The Hawkish Monetary Policy Strategy is Expansionary

S2: The Dovish Monetary Policy Strategy is Contractionary

• S1 is TRUE, S2 is FALSE

• S1 is FALSE, S2 is TRUE

• Both are FALSE

• Both are TRUE

Answer explanation

Hawkish is CONTRACTIONARY & Dovish is EXPANSIONARY

S1: In Expansionary, the central bank lowers policy rate and increases cost of borrowing.

S2: In Contractionary, the central bank raises policy rate and decreases cost of borrowing

• S1 is TRUE, S2 is FALSE

• S1 is FALSE, S2 is TRUE

• Both are FALSE

• Both are TRUE

Answer explanation

S1: In Expansionary, the central bank lowers policy rate and DECREASES cost of borrowing.

S2: In Contractionary, the central bank raises policy rate and INCREASES cost of borrowing

Reduce the Effectiveness and Increase the Uncertainty of Active Policies

This lag arises because it takes time for policymakers to recognize that a shock has occurred and then to put appropriate policies into effect.

This lag arises because policies do not immediately influence spending, income, and employment.

Two lags that are relevant for the conduct of stabilization policy:

S1: Stabilization Policy attempts to smooth out the business cycle. It Requires the ability to accurately predict future economic conditions successfully

S2: The Business cycle is a long-term movement of output and other key economic variables around their long-term trends

• S1 is TRUE, S2 is FALSE

• S1 is FALSE, S2 is TRUE

• Both are TRUE

• Both are FALSE

Answer explanation

(TRUE) S1: Stabilization Policy attempts to smooth out the business cycle. It Requires the ability to accurately predict future economic conditions successfully

(FALSE) S2: The Business cycle is a SHORT-TERM movement of output and other key economic variables around their long-term trends

A type of lag where output is rising, along with income and employment and data may not be reliable enough to use for stabilization policy