CFAI Practice: M04 — Monetary Policy

Source: CFAI Official Practice Problems 2026

Questions

1. Decrease in policy rate → desired impact:

• A. increase in investment ✓
• B. increase in interbank rates
• C. increase in currency value

2. To encourage borrowing, least likely:

• A. sell long-dated government securities ✓ (this tightens)
• B. purchase long-dated treasuries
• C. purchase mortgage bonds

3. Repeated open market purchases:

• A. decreases money supply
• B. prohibited
• C. consistent with expansionary monetary policy ✓

4. Rate near zero, no growth:

• A. QE must be limited
• B. effectiveness of monetary policy may be limited ✓
• C. targeting reserves > rates

5. Raising reserve requirement:

• A. neutral
• B. expansionary
• C. contractionary ✓

6. Limitation in deflation:

• A. Ricardian equivalence
• B. interaction with fiscal
• C. interest rates cannot fall significantly below zero ✓

7. Least likely limitation:

• A. cannot accurately determine neutral rate ✓ (not a major limitation)
• B. cannot regulate willingness to lend
• C. cannot control deposits

8. Quantitative easing:

• A. neutral
• B. expansionary ✓
• C. contractionary