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Free CFA-Level-I Exam Braindumps (page: 356)

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Which of the following is/are true about monetary policy?

  1. The money supply is neutral in the long-run.
    II. Monetary policy can only serve to decrease economic volatility.
    III. Of the monetary aggregates, Central Bankers only have direct control over the monetary base.
  2. I, II, III
  3. III only
  4. I only
  5. I, III
  6. none of these answers is correct
  7. II only

Answer(s): C

Explanation:

In the long-run, relative prices are important, not the price level itself. To understand why, imagine if your salary increased by ten times but so did the price of all the goods you buy. This would be a neutral event.
If money is neutral, then monetary policy can have no long-term effect. However, in the short-term, changes in the price level can cause producers to change their production choices, ostensibly helping to smooth out the business cycle.
Central Bankers generally have control over the bank reserve requirement and the level of currency. They do not have control over the amount of currency individuals put into deposit accounts which could later be lent out by banks. Hence, Bankers control the monetary base, but not other money aggregates such as M2 and M3.



Keynesian analysis suggests that a planned budget surplus

  1. will affect aggregate demand only if the money supply decreases by the size of the surplus.
  2. is proper during periods of inflation but may increase unemployment if timed improperly.
  3. will stimulate output and employment.
  4. will stimulate both consumption and income.

Answer(s): B

Explanation:

Keynesians support "counter-cyclical" polices: that is, under an inflationary/full capacity economy, the government should reduce spending (operate under a budget surplus) to contract aggregate demand and control economic growth so as to avoid high levels of inflation. Thus, a budget surplus is appropriate during periods of inflation. If such a policy is enacted when the economy is below full capacity, the proper counter- cyclical policy for the government is to deficit spend. Thus, if the government operates under a budget surplus in this situation, aggregate demand will further contract and unemployment will increase.



Within the Keynesian aggregate expenditure model, the central catalyst that leads to changes in output and employment is changes in

  1. prices.
  2. aggregate supply.
  3. wage rates.
  4. aggregate expenditures.

Answer(s): D

Explanation:

Aggregate expenditures are the catalyst of the Keynesian model. Until full employment is attained, supply is always accommodative. Increases in aggregate expenditures thus lead to an expansion in both output and employment as long as the economy is operating below potential capacity.



Built-in features that tend to promote a budget deficit during a recession and a budget surplus during an inflationary boom are known as ________.

  1. automatic stabilizers
  2. counter-cyclical policies
  3. active budget deficits
  4. restrictive fiscal policies

Answer(s): A

Explanation:

Such built-in stabilizers exist independently of any policy change: tax revenues necessarily fall during a recession (as the economy contracts, there is less income to tax) and government expenditures necessarily rise (more individuals receive government transfers such as unemployment benefits or welfare payments). The converse is true for an inflationary environment: tax revenues are in excess of government expenditures creating a budget surplus. The consequence of these automatic reactions is that during a recession, the economy is stimulated by higher government spending and during inflation economic activity is reduced by smaller government spending.






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