CFA Level I · CFA Level I Exam · Monetary Policy
A central bank cuts its policy rate from 6.0% to 5.0%. The neutral rate is 3.0%. The stance after the cut is best described as:
The stance remains contractionary. Stance is determined by comparing the policy rate with the neutral rate, not by the direction of the last change. At 5.0% the rate is still above the 3.0% neutral rate, so policy continues to restrain the economy.
- Aexpansionary, because the rate was lowered
- Bcontractionary, because the rate remains above neutralCorrect
- Cneutral, because the rate is near the previous level
Explanation
The stance depends on the level of the policy rate relative to neutral, not on the direction of change. At 5.0% the rate is still 2 percentage points above the 3.0% neutral rate, so policy remains contractionary, though less so than before.
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