TEST YOURSELF – TEN MULTIPLE CHOICE

a. The most important monetary policy tool of the Bank of England is

1. the Budget deficit.
2. the exchange rate.
3. the cash rate.
4. the 90 day Treasury Bill rate.

b. Real interest rates are usually defined as

1. the actual market rates available for households and business.
2. nominal interest rates less the rate of UK inflation.
3. nominal interest rates less the overseas rate.
4. the official cash rate determined by the Bank of England.

c. If the rate of interest on bank loans is 10% and the expected rate of inflation is 3% and the economic growth rate is 4%, then the real rate of interest on bank loans is

1. 13%.
2. 7%
3. 6%
4. 3%

d. What effect will an increase in household saving have on the market for loanable funds?

1. The supply of loanable funds will decrease increasing interest rates.
2. The supply of loanable funds will increase decreasing interest rates.
3. The demand for loanable funds will decrease decreasing interest rates.
4. The demand for loanable funds will increase increasing interest rates.

e. Which of the following could explain a general fall in interest rates?

1. A sudden decrease in consumption and investment spending.
2. A shortage of funds available for lending.
3. A tightening of monetary policy.
4. An increase in the rate of inflation.

f. In the UK the most important economic policy used to stabilise the economy is

1. fiscal policy.
2. monetary policy.
3. microeconomic reform.
4. wages policy.

g. If you had to choose between holding your wealth as money or as an interest bearing bond, the ________ the interest rate on the bond the _________ money you would hold.

1. higher, more.
2. lower, less.
3. higher, less.
4. none of the above.

h. Which of the following is most likely to be affected by changes in the rate of interest?

1. consumer spending.
2. investment spending.
3. government spending.
4. exports of goods and services.

i. The Bank of England is responsible for

1. controlling the exchange rate and the inflation rate.
2. administering both monetary policy and fiscal policy.
3. controlling the cash rate and the exchange rate.
4. administering monetary policy and maintaining financial stability.

j. A government budget deficit will

1. increase the supply of loanable funds increasing interest rates.
2. decrease the supply of loanable funds decreasing interest rates.
3. increase the demand for loanable funds decreasing interest rates.
4. decrease the demand for loanable funds increasing interest rates.