CFA Level I · CFA Level I Exam · Monetary Policy
A central bank targeting inflation of 2% sees inflation at 4% and output at potential. The neutral nominal policy rate is 3%. Assuming the central bank follows a policy that is most consistent with its mandate, which policy rate stance is most likely appropriate?
A policy rate above the 3% neutral rate is most appropriate. Inflation exceeds the 2% target while output is at potential, so the central bank should tighten to bring inflation down. Rates below neutral would be expansionary and push inflation higher.
- AA rate below 3% to stimulate growth
- BA rate equal to the 2% inflation target
- CA rate above 3% to restrain inflationCorrect
Explanation
Inflation above target with output at potential calls for contractionary policy, meaning a policy rate above the neutral rate of 3%. A rate below neutral would be expansionary and worsen inflation, and setting the rate at the inflation target ignores the neutral rate and would be accommodative.
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
- Market participants believe that a central bank's inflation target is not credible and expect a policy rate cut to cause higher inflation. T…
- A central bank states that it targets a low and stable inflation rate of 2%. The most likely reason that many central banks choose a small p…
- Central bank independence is most likely strengthened when the central bank has:
- A central bank cuts its policy rate. Through the exchange rate channel of the monetary transmission mechanism, the cut would most likely lea…
- A central bank has operational independence but its inflation target is set by the government. This arrangement is best described as an exam…
- A central bank has cut its policy rate to zero and inflation remains well below target. It then buys long-dated government bonds from banks …