CFA Level I · CFA Level I Exam · Monetary Policy
A country's central bank is widely believed to be credible, and it announces a gradual disinflation path. Compared with a bank lacking credibility, it most likely faces:
A credible central bank most likely faces a smaller output loss, because its announcement lowers inflation expectations, which feed into wage and price setting. Without credibility, expectations stay high and disinflation requires more economic slack and a larger output sacrifice.
- Aa larger output loss because wage setters ignore announcements
- Ba smaller output loss because expectations adjust with the announcementCorrect
- Cthe same output loss because expectations never influence wages
Explanation
Credible policy lets inflation expectations fall quickly, so wage and price setting adjusts and disinflation is less costly in lost output. A bank lacking credibility must rely on actual slack to lower expectations.
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 has expanded its balance sheet substantially through asset purchases, yet bank lending and money growth remain weak because b…
- Which of the following is most likely a core function of a central bank?
- A central bank's policy rate is set below the estimated neutral rate. The monetary policy stance is best described as:
- A central bank is financing persistent government deficits by creating money, and investors begin to expect higher future inflation. The mos…
- 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 neutral interest rate in an economy is most likely equal to the sum of the: