Analysis of Interest Rate Changes (MCQ Revision Questions)

This this revision video you get the chance to have a go at three multiple choice questions each of which tests your understanding about the likely effects of changes in monetary policy.

Question 1 Reasoning:

Impact of government sale of bonds to the commercial banks

• Sale of government bonds e.g. to the commercial banks
• Banks pay for the bonds with cash
• This reduces the liquidity of the banking system
• Makes commercial banks less able to lend out to borrowers
• Squeezes the supply of credit
• I.e. a contractionary monetary policy
• This is the opposite of quantitative easing