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. What is a primary function of the central bank in an economy?

    • Accepting retail deposits
    • Providing consumer mortgages
    • Banker to government
    • Issuing corporate bonds

  2. Which body within the Bank of England sets the official UK Bank Rate?

    • Prudential Regulation Authority
    • Financial Conduct Authority
    • Monetary Policy Committee
    • Financial Policy Committee

  3. What is the UK government's official CPI inflation target for the Bank of England?

    • 3 per cent
    • 1 per cent
    • 2 per cent
    • 5 per cent

  4. What asset does a central bank primarily purchase when conducting quantitative easing?

    • Commercial property
    • Corporate shares
    • Foreign currency
    • Government bonds

  5. What does a central bank communicate to markets when issuing forward guidance?

    • Past inflation figures
    • Current tax changes
    • Future policy rates
    • Government spending targets

  6. What was the main aim of the Bank of England's Funding for Lending Scheme?

    • Reduce government borrowing
    • Boost bank lending
    • Increase income tax
    • Strengthen exchange rates

  7. What term describes the process through which central bank interest rate changes affect aggregate demand?

    • Fiscal stance
    • Transmission mechanism
    • Accelerator process
    • Multiplier effect

  8. An increase in the Bank Rate by the central bank is intended to have what effect on inflation?

    • Increase inflation
    • Has no effect
    • Accelerate inflation
    • Decrease inflation

  9. How does an appreciation of the exchange rate typically affect UK aggregate demand?

    • Decreases aggregate demand
    • Increases aggregate demand
    • No demand impact
    • Stabilises price level

  10. If CPI inflation rises well above target, how would the Monetary Policy Committee usually respond?

    • Increase quantitative easing
    • Lower reserve ratios
    • Raise bank rate
    • Cut bank rate

  11. When quantitative easing increases bond prices, what happens to bond yields?

    • Yields remain unchanged
    • Bond yields rise
    • Yields double instantly
    • Bond yields fall

  12. Which variable is forward guidance primarily designed to influence?

    • Current tax rates
    • Government spending plans
    • Future interest expectations
    • Daily exchange rates

  13. Which policy tool allows the Bank of England to directly increase commercial bank reserves?

    • Supply-side reform
    • Quantitative easing
    • Fiscal stimulus
    • Maximum price limits

  14. Which factor is monitored by the Monetary Policy Committee when setting the bank rate?

    • Income tax rates
    • Council tax bands
    • The budget deficit
    • The output gap

  15. What type of inflationary pressure is caused by a depreciation of the exchange rate?

    • Hyperinflation
    • Cost-push inflation
    • Monetary inflation
    • Demand-pull inflation

  16. What is a major limitation of using bank rate changes to control inflation?

    • Zero cost
    • Complete certainty
    • Immediate impact
    • Long time lags

  17. Which potential drawback is associated with prolonged quantitative easing?

    • Wealth inequality
    • High unemployment
    • Reduced exchange rates
    • Severe deflation

  18. Raising interest rates to curb inflation carries which macroeconomic trade-off?

    • Increased government borrowing
    • Slower economic growth
    • Higher import costs
    • Rising price levels

  19. Why might commercial banks not pass on a bank rate cut fully to borrowers?

    • Legal maximum rates
    • Fixed exchange rates
    • Zero profit margins
    • High funding costs

  20. What is the main advantage of operational independence for a central bank?

    • Direct political control
    • Greater policy credibility
    • Lower tax rates
    • Higher government spending

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