Economics - Economics Section 2
71. The most likely benefit of adopting an exchange rate target is:
- Option : C
- Explanation : With an exchange rate target, a country imports the inflation experience of the economy whose currency is being targeted.
72. Which of the following is least likely a feature of an inflation-targeting framework?
- Option : B
- Explanation : Inflation targeting requires an independent and credible central bank. A and C are features of an inflation-targeting framework.
- Option : A
- Explanation : Buying government bonds results in an increase of the bank’s reserves and increases banks’ ability to lend, causing an increase in money growth through the multiplier mechanism and results in an expansion in the economy.
- Option : C
- Explanation : When a central bank sells securities, bank reserves decrease. So the banks have to decrease their lending, thereby decreasing the money supply.
75. Monetary policy is most likely to be contractionary for:
| GDP growth rate | Inflation Target | Policy Rate | |
| A. | 3% | 2% | 6% |
| B. | 1% | 4% | 5% |
| C | 2% | 3% | 4% |
- Option : A
- Explanation : Monetary policy is contractionary when the policy rate is above the neutral rate. Hence, when policy rate is 6% and neutral rate is 5% (3% + 2%), the policy is contractionary.
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