Lesson 4.2.4.3

4.2.4.3 Central banks and monetary policy Quiz: AQA Economics, Unit 2

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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Lesson 4.2.4.3, Central banks and monetary policy: 20 multiple choice questions for the AQA Economics (7136), Unit 2: The national and international economy, written with Revision Ninja.

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The 20 questions

  1. Which of the following is a main function of a central bank?

    • Acting as banker to the government and to commercial banks
    • Selling shares in companies on the stock market
    • Taking deposits from households and making personal loans, which is the main activity of the central bank on the high street
    • Setting the level of government spending each year

  2. Which body in the UK sets the bank rate?

    • The Monetary Policy Committee of the Bank of England
    • The Treasury Select Committee in Parliament, which reviews the bank rate decisions and sets the target for inflation each year
    • The Financial Conduct Authority
    • The Office for Budget Responsibility

  3. What is the government's current inflation target for the UK, set for the Bank of England's Monetary Policy Committee?

    • 0 per cent, meaning prices must not rise at all
    • 5 per cent, measured by the retail prices index
    • 10 per cent, measured by the producer price index
    • 2 per cent, measured by the Consumer Prices Index

  4. What is quantitative easing?

    • A government decision to raise income tax to reduce spending
    • A rise in the bank rate to reduce the money supply and so lower the amount of credit available to households and businesses
    • Central bank purchases of assets, such as government bonds, to increase the money supply and lower long-term interest rates
    • A commercial bank's decision to lend more to households

  5. What is forward guidance?

    • A plan by the government to set taxes for the coming year, which is published alongside the budget and binds the central bank's decisions
    • Central bank communication about the likely future path of interest rates and monetary policy
    • A forecast of exchange rates made by commercial banks
    • A guarantee that bank deposits will always be repaid

  6. What is the Funding for Lending scheme designed to do?

    • Lower the cost of bank lending to households and businesses by providing cheap funding to banks
    • Provide grants to firms to pay their wage bills
    • Raise the cost of borrowing for households to reduce inflation
    • Reduce the number of commercial banks in the economy by encouraging mergers and closures among smaller lenders in each region

  7. Which is the best description of the monetary policy transmission mechanism?

    • The process by which changes in interest rates affect spending, asset prices and the exchange rate, and so inflation and output
    • The process by which workers agree wage increases with employers
    • The process by which firms decide on their investment plans each year
    • The process by which the government raises taxes and cuts spending to reduce the budget deficit, which lowers aggregate demand directly

  8. Bank rate rises from 0.5 per cent to 1.5 per cent. Which sequence best describes the likely effect on inflation?

    • Borrowing costs rise, spending and investment fall, aggregate demand slows, and inflation tends to fall
    • Borrowing costs fall, spending rises, aggregate demand rises, and inflation increases
    • Borrowing costs rise, but aggregate demand rises because savers have more income, which leads households to spend more on goods
    • Borrowing costs fall, but inflation rises because the exchange rate depreciates

  9. Higher UK interest rates relative to other economies cause the pound to appreciate. What is the likely effect on aggregate demand?

    • Exports become cheaper and imports dearer, raising net exports and aggregate demand
    • Exports become dearer and imports cheaper, reducing net exports and aggregate demand
    • Aggregate demand is unaffected because exchange rates do not affect spending
    • Exports and imports both rise by the same amount, leaving aggregate demand unchanged

  10. CPI inflation is 4 per cent against a target of 2 per cent. What would a monetary policy response typically be?

    • Raise interest rates to reduce demand and bring inflation back towards the target
    • Reduce the exchange rate to lower the price of goods for consumers
    • Keep interest rates unchanged because inflation does not affect the economy, since prices adjust by themselves in the long run
    • Cut interest rates to increase the money supply and raise inflation further

  11. Quantitative easing tends to raise asset prices and lower long-term yields. Which outcome is most consistent with this?

    • Bond prices and yields both rise together as the money supply rises
    • Bond prices fall and yields rise, while share prices fall
    • Bond prices rise and yields fall, while share prices tend to rise
    • Bond prices and yields are unaffected by central bank purchases

  12. Forward guidance is used by the central bank to influence which variable most directly?

    • Market expectations of future interest rates, and so longer-term borrowing costs
    • The number of commercial bank branches in the economy
    • The composition of the government's tax revenue, which is set by the Treasury and affects the bank's inflation forecast each year
    • The current level of government spending on public services

  13. Which of the following is one way in which the Bank of England can influence the growth of the money supply?

    • By setting the amount of income tax paid by households
    • By printing new banknotes to hand to the government each year
    • By changing the bank rate and buying or selling assets, which affects bank lending and money creation
    • By deciding the number of shares that companies can issue on the stock market, which the Bank of England regulates each year

  14. Which factors are considered by the Monetary Policy Committee when setting bank rate?

    • Only the level of government debt and the budget deficit, which the MPC monitors each month when deciding on the appropriate bank rate
    • The inflation outlook, the output gap, labour market conditions and the exchange rate
    • Only the price of oil on world markets
    • Only the number of people claiming unemployment benefit

  15. A fall in the pound raises the sterling price of imported raw materials. What is the implication for monetary policy?

    • It may add cost-push pressure on inflation, which the MPC must consider when setting rates
    • It only affects the government's budget, not the central bank
    • It has no effect on inflation or on the MPC's decisions
    • It always reduces inflation, so interest rates should be cut immediately, since a weaker pound lowers the cost of every import

  16. Evaluate the effectiveness of changes in bank rate as a tool for controlling inflation.

    • It has no effect on inflation, because prices are set by firms alone
    • It is always fully effective within a few weeks, with no lags or uncertainty, because the effects on spending are immediate and certain
    • It can be effective, but time lags, uncertainty about spending responses and global shocks limit its precision
    • It works only on the exchange rate and has no effect on demand

  17. Evaluate the use of quantitative easing to support the economy.

    • It always reduces inequality, because it raises the wages of all workers
    • It can lower borrowing costs and support asset prices, but it may increase inequality and create asset price bubbles
    • It always raises inflation sharply, so it should never be used by any central bank, whatever the state of the economy or the labour market
    • It has no effect on asset prices, so it is always harmless

  18. Why might the central bank face a trade-off when raising interest rates to control inflation?

    • Higher rates reduce the exchange rate, which raises both growth and inflation
    • Higher rates have no effect on either growth or inflation
    • Higher rates reduce demand and inflation but can also slow growth and raise unemployment in the short run
    • Higher rates always raise growth and reduce unemployment, so there is no trade-off between the objectives of the central bank in any period

  19. Why might changes in bank rate not pass fully into the lending rates that households and firms pay?

    • Banks are legally required to match every change in bank rate exactly, within the same day, so there is never any lag in pass-through
    • Banks set their own lending rates based on funding costs, competition and risk, so pass-through can be incomplete
    • Lending rates are set by the government, which ignores bank rate
    • Lending rates depend only on the exchange rate and not on bank rate

  20. Evaluate the argument that the central bank should be independent from the government.

    • Independence means the central bank must always follow government spending plans and cannot set interest rates without Treasury approval
    • Independence means the central bank sets tax rates without consultation
    • Independence can build credibility for the inflation target, though it raises questions about democratic accountability
    • Independence is irrelevant, because the central bank has no effect on inflation

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