CFA Level I · CFA Level I Exam · Monetary Policy
A central bank announces a reduction in its policy rate. Through the exchange rate channel of monetary policy transmission, the change is most likely to:
A policy rate cut most likely lowers the domestic currency's value and raises import prices. Lower domestic returns prompt capital outflows and depreciation, which makes imports costlier and exports cheaper, increasing inflationary and demand pressure.
- Araise the domestic currency's value and lower import prices
- Blower the domestic currency's value and raise import pricesCorrect
- Cleave the exchange rate unchanged because trade flows are fixed
Explanation
A lower policy rate reduces returns on domestic assets, so capital outflows weaken the domestic currency. A weaker currency makes imports more expensive and exports cheaper, adding to inflation and demand. Option A describes the effect of tightening.
Did you get it right without looking?
One question tells you little. A timed set on Monetary Policy shows your real accuracy, how long you take and where you lose marks.
More Monetary Policy questions
- A central bank targeting inflation of 2% sees inflation at 4% and output at potential. The neutral nominal policy rate is 3%. Assuming the c…
- A country's central bank is widely believed to be credible, and it announces a gradual disinflation path. Compared with a bank lacking credi…
- Which of the following is the most likely reason central banks act as lender of last resort?
- Which of the following is the best description of the central bank's role as lender of last resort?
- A central bank announces that it expects to keep its policy rate unchanged until unemployment falls below a stated level. The main way this …
- Which statement best describes how fiat money differs from commodity money?