Monetary Policy and What a Central Bank Can Do · seed 1 · A4, ink-friendly. The answer key prints on its own page for grown-ups.

One rate that reaches your shop

Civics & Economics · Economics · ages 16-18
Name ______________________   Date ____________

  1. Which two jobs sit in most central bank mandates?

    • Stable prices plus jobs for as many as possible
    • Fixed gold prices plus free holidays
    • Zero interest forever plus closed banks

  2. What is a central bank's main monetary lever?

    • Setting every mortgage rate by decree
    • Moving one short-term policy rate that ripples outward
    • Printing wages for every worker

  3. A rate change today may not reach shops for several quarters.

    Circle one:   True   False

  4. Trace a rate cut to the weekly shop.

    • Policy rate falls, loans cheapen, families buy homes and cars
    • Policy rate falls, loans cost more, families stop buying
    • Policy rate rises, loans cheapen, demand explodes

  5. Prices climb too fast. The bank pushes rates up. What follows?

    • Rates rise, borrowing cools, and price pressure eases
    • Rates vanish and money becomes free
    • Wages are set directly by decree

  6. Everyone expects 5 percent inflation. How does that belief move present prices?

    • Firms cut prices to match hopes
    • Workers seek bigger raises and firms lift prices to cover them
    • Banks pay savers extra for fun

  7. A trusted bank promises low inflation. How does belief alone help?

    • Trust that low inflation stays, so wages and prices stay calm
    • Expect chaos, so raise all prices at once
    • Ignore the bank and guess randomly

  8. Energy runs short and food prices jump. What can dearer money achieve?

    • It grows more wheat and oil directly
    • It hires workers for empty posts
    • It cannot create missing goods, so dearer money only cools bidding
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Answer key

For grown-ups. Fold this page away before handing over the rest.

One rate that reaches your shop W1-mt_w0xvI0iouQ-s1

  1. Stable prices plus jobs for as many as possible · Most central banks serve two jobs at once through the one policy rate.
  2. Moving one short-term policy rate that ripples outward · The central bank moves one rate, and banks pass it into loans and mortgages.
  3. True · Each link from banks to borrowers takes time, so spending answers quarters later.
  4. Policy rate falls, loans cheapen, families buy homes and cars · Cheaper borrowing lifts big purchases, and that spending adds up to stronger demand.
  5. Wages are set directly by decree · Costlier borrowing slows spending, which takes heat out of prices.
  6. Workers seek bigger raises and firms lift prices to cover them · Acting on expected rises makes them real, in a loop called a wage-price spiral.
  7. Trust that low inflation stays, so wages and prices stay calm · Credibility turns calm beliefs into calm behaviour, which keeps inflation low by itself.
  8. It cannot create missing goods, so dearer money only cools bidding · Monetary policy steers total spending, not supply, so shortages stay short whatever rates do.
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