A central bank’s latest macroeconomic forecast indicates that actual GDP\text{GDP}GDP is projected to exceed trend GDP\text{GDP}GDP by an increasing margin over the next four quarters, leading to an expanding positive (inflationary) output gap.
Which one of the following monetary policy measures is most likely to prevent this positive output gap from widening further in the short run?
The central bank lowering the reserve asset ratio for commercial banks to stimulate commercial lending.
The central bank increasing its main policy interest rate and conducting quantitative tightening (selling government bonds).
The central bank purchasing corporate and sovereign debt through a large-scale asset purchase programme.
The central bank providing forward guidance that interest rates will be maintained at historically low levels.
176 exam-style questions on AQA A Level Economics 2.4 Financial markets and monetary policy (A-level only), covering 2.4.1 The structure of financial markets and financial assets, 2.4.2 Commercial banks and investment banks, 2.4.3 Central banks and monetary policy, and 2.4.4 The regulation of the financial system. Each one has a worked solution and a mark scheme showing where the marks go.