Which of the Following Situations Is Likely to Cause a Central

question 16

Multiple Choice

Which of the following situations is likely to cause a central bank to undertake a loose monetary policy?

• A) A rapidly rising inflation level.
• B) Very low inflation level along with a rapid increase in unemployment.
• C) Inflation below the target level along with good GDP growth.
• D) Actual GDP substantially exceeding potential GDP.

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Definitions:

Open Market

A venue where buyers and sellers engage in the trade of commodities, securities, and other financial instruments under defined regulations.

Reserve Ratio

The fraction of deposits that banks are required to keep on hand as reserves, determined by central banking authorities.

Deposit Expansion Multiplier

The ratio that describes the potential increase in money supply through the banking system via fractional reserve banking.

Government Bonds

Debt securities issued by a government to support government spending and obligations, typically offering a fixed rate of return over a specified period.