CFA Level I · CFA Level I Exam · Monetary Policy
A central bank has expanded its balance sheet substantially through asset purchases, yet bank lending and money growth remain weak because banks hold the new reserves as excess reserves and households are reluctant to borrow. This outcome is most consistent with:
This is most consistent with a weak monetary transmission mechanism. Reserves created by the central bank sit idle as excess reserves because banks will not lend and households will not borrow, so policy fails to reach spending and inflation.
- Acrowding out in the government bond market
- Ba weak monetary transmission mechanismCorrect
- Can inverted real exchange rate
Explanation
When added reserves do not translate into lending, spending, or money growth, the transmission mechanism is impaired, a limitation of monetary policy. Crowding out relates to fiscal borrowing raising rates, and an inverted real exchange rate is not the issue described.
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