CFA Level I · CFA Level I Exam · Monetary Policy
A central bank's policy rate is set below the estimated neutral rate. The monetary policy stance is best described as:
The stance is expansionary. A policy rate below the neutral rate neither restrains nor neutrally supports growth; it stimulates borrowing, spending and investment, so it is accommodative. A contractionary stance requires a policy rate above the neutral rate.
- AContractionary
- BExpansionaryCorrect
- CNeutral
Explanation
The stance is judged by comparing the policy rate with the neutral rate, not by the absolute level of the rate. A policy rate below neutral encourages borrowing, spending and investment, so the stance is expansionary. Contractionary would require a rate above neutral.
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 targets an inflation rate of 2%, and actual inflation is 4% with the economy growing above potential. Following a Taylor-rule…
- 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 sets a reserve requirement of 8%. Assuming banks hold no excess reserves and there is no cash leakage, a new deposit of 500,0…
- Central bank independence is most likely strengthened when the central bank has:
- 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 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: