FRM Part II · FRM Exam Part II · Monetary and Fiscal Policy: Safeguarding Stability and Trust
An analyst notes that a central bank has been given an explicit financial stability objective in addition to price stability. Which is the most likely tension the analyst should flag?
The key tension is that the objectives can conflict: raising rates to bring down inflation can strain highly indebted borrowers and financial institutions, threatening financial stability. This is why central banks often rely on separate macroprudential tools alongside interest rate policy.
- APrice stability and financial stability objectives can conflict, e.g., raising rates to curb inflation may strain leveraged borrowers and weaken financial institutionsCorrect
- BFinancial stability objectives always require higher rates than price stability
- CThe two objectives can never be pursued with separate tools
- DAdding the objective eliminates the need for macroprudential policy
Explanation
Tightening to control inflation can stress indebted borrowers and banks, creating a trade-off. Macroprudential tools are typically used alongside to reduce that conflict, so they remain needed. The other statements are absolute and incorrect.
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