Central Banking Around the World: Checkpoint 1

Quick checkpoint - five questions on balance sheets, setting rates, quantitative tightening, mandates and transmission.

Question 1 of 5 What happens to a central bank's balance sheet when it buys a government bond?

It shrinks Both assets and liabilities grow, as new reserves are created Nothing changes Only liabilities fall

The bond is an asset, and the new reserves are a liability.

Question 2 of 5 Why does paying interest on reserves act as a floor for interest rates?

Banks will not lend more cheaply than the rate they can earn safely at the central bank It bans lending It raises taxes It prints more cash

This lets central banks control rates even with abundant reserves.

Question 3 of 5 How do most central banks carry out quantitative tightening?

By printing money Mainly by letting maturing bonds run off without replacing them By buying more bonds By cutting interest rates to zero

Some, like the Bank of England, also actively sold bonds.

Question 4 of 5 What inflation target did India adopt in 2016?

2 percent with no band 4 percent with a tolerance band of 2 to 6 percent 10 percent Zero inflation

This is called flexible inflation targeting.

Question 5 of 5 What did Milton Friedman say about monetary policy's effects?

They are immediate They act with long and variable lags They never affect inflation They only affect exports

Central banks must act on forecasts because effects take time.

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