Test your knowledge on monetary policy and price stability and see if you could make it as a central bank Governor. 

Assignment 1/4:

The Governing Council of the ECB decides on interest rates

Finland is part of the euro area. Responsibility for the conduct of the single monetary policy in the euro area lies with the Eurosystem. It is composed of the national central banks (NCBs) in the euro area and the European Central Bank (ECB).

Key monetary policy instruments include the policy rates (ECB: also referred to as the key ECB interest rates), on which the Governing Council of the ECB decides in the euro area. In support of its decision-making, the Governing Council of the ECB assesses the nature of the risks to euro area price stability. The Governing Council may decide to raise or lower the key ECB interest rates or keep them unchanged.

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[Missing text '/economyassignmentblock/question' for 'English']: 1/12

It is the first Thursday of September. Mario Draghi, the President of the European Central Bank, opens the front door of the European Central Bank in Frankfurt and greets the doorman. This is one of those days when an important meeting will again be held. In addition to Draghi, this meeting will also be attended by the other members of the Executive Board of the ECB and the governors of the central banks of the countries that have adopted the euro. What is this meeting?

[Missing text '/economyassignmentblock/question' for 'English']: 2/12

The same group of central bankers assembles for these meetings in Frankfurt twice a month. What do they decide at their meetings among other things?

The Governing Council of the ECB has no power of decision, for example, in respect of matters related to EU enlargement or the euro area budget.

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The whole group is now seated at the round table, and the meeting can begin. The President of the ECB chairs the meeting. Who of the following are also present?

Only the governors of the euro area central banks take part in decisions in the Governing Council of the ECB on matters concerning the euro area.

[Missing text '/economyassignmentblock/question' for 'English']: 4/12

This time, the meeting is a ‘rate-setting meeting’. Accordingly, the meeting discusses what should be done with the policy rate (ie the key ECB interest rate). Some argue for keeping it unchanged, others would like to lower it. If no unanimity can be reached and it is necessary to vote on the issue, who of the members of the Governing Council has the greatest power of decision at the meeting?

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What are the options available for an interest-rate decision at the meeting?

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Do you happen to remember what monetary policy means?

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Does fiscal policy mean the same as monetary policy?

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When the Governing Council of the ECB decides on monetary policy, what type of analysis does it conduct in support of its decision?

The Members of the Governing Council of the ECB are not allowed to take instructions from other institutions or bodies, such as political decision-makers.

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What are the criteria on which the Governing Council of the ECB makes monetary policy decisions at its meetings?

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This Thursday, as always after the ‘rate-setting meeting’ of the Governing Council of the ECB, ECB President Draghi also will host a press conference for journalists at the European Central Bank. At the press conference, the President of the ECB will announce a reduction of 0.5 percentage point in the policy rate (ie the key ECB interest rate). Can you tell what effects this reduction may have on people's lives in Finland?

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Which of the following sentences you are sure not to hear from ECB President Draghi at the press conference?

The primary objective of the ECB's monetary policy is to maintain price stability. The Members of the Governing Council of the ECB are not allowed to take instructions from other institutions or bodies, such as political decision-makers.

[Missing text '/economyassignmentblock/question' for 'English']: 12/12

Friday-morning newspapers all over Europe write about the decisions made by the Governing Council of the ECB on the previous day. What are the words used by the newspapers in describing the 0.5 percentage point cut in the policy rate?

Monetary policy tightening refers to raising the policy rate.

You answered correctly:

NB! You can check the correct answers for each question

Assignment 2/4:

Prices under control

The main objective of the ECB's monetary policy is to maintain price stability in the euro area, thereby safeguarding the purchasing power of the euro. Price stability refers to conditions where there are no real signs of inflation or deflation, where prices do not fall or rise significantly but remain stable. Price stability is defined as a year-to-year increase in consumer prices of below 2%, and price stability is to be maintained over the medium term.

Inflation is harmful in many ways. It undermines economic decisions and leads to slower economic growth. In addition, inflation is unfair, since it eats up the value of savings and weakens the position of small savers in particular. Deflation is even more harmful than inflation. It results in a downward spiral of prices and wages while the value of money goes up. During periods of deflation, repayment of loans must be made with money that is worth more than when the loan was taken, and hence deflation has often given rise to debt crises and a growth in bankruptcies.

[Missing text '/economyassignmentblock/question' for 'English']: 1/9

Minna works as an economist at the Bank of Finland and is tasked with monitoring the euro area economy and especially euro area price developments. How are price developments monitored?

[Missing text '/economyassignmentblock/question' for 'English']: 2/9

Minna is responsible for reporting to the Governor of the Bank of Finland on inflation developments in coming years. The latest euro area data point to an inflation rate of 1.9%. All suggests that average inflation will also remain just under 2% in the next few years. What does Minna tell the Governor?

An inflation rate of 1.9% is in line with the ECB's objective of price stability. Deflation refers to a fall in prices. This does not seem likely according to what is explained in the text related to the question.

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Minna also maintains a popular blog ‘Give the inflation bugbear a beating’, where she reports the current interesting news on the economy. This morning Minna updated her blog with the latest inflation data. Konsta, who had just received his driving licence, already gave feedback to Minna, noting that he had difficulties in believing in moderate inflation, because fuel is getting more expensive all the time. What does Minna answer?

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During the day, Minna's blog also becomes an arena for discussion on deflation. Minna has written that deflation may be even more dangerous than inflation. Maarit does not understand what deflation means. What does Minna answer?

[Missing text '/economyassignmentblock/question' for 'English']: 5/9

Minna is satisfied that so many of the blog readers appear to be interested in inflation, because the primary objective of the ECB's monetary policy is precisely to maintain price stability in the euro area. Minna still asks whether everybody knows which of the following inflation figures is closest to the ECB's objective of price stability?

The Governing Council of the ECB seeks to maintain the inflation rate below, but close to, 2% over the medium term, which is about 2–5 years. If the objective were 0%, there would be a threat of deflation.

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Do you know yourself what this inflation objective is aimed at, among other things?

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Can you tell what is more important than the objective of price stability when the Governing Council of the ECB makes its interest rate decision?

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Minna's weekly question to the blog readers is what will happen to prices if inflation slows from 3% to 1%. What is the answer to the week's question?

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There will be a draw from among those who have given the right answer to determine who will receive the prize, an MP3 player. In updating data on the prize in the blog, Minna makes a typing error and accidentally writes EUR 10,000 as the value of the player worth EUR 100. Whoops, now hyperinflation seems to be hitting, is Konsta's immediate response to the blog message. How is hyperinflation often defined?

You answered correctly:

NB! You can check the correct answers for each question

Assignment 3/4:

Test whether you would make a good central bank governor!

Use this test to determine whether you would make a good central bank governor! Think about the interest rate decision from the viewpoint of the European Central Bank. You are expected to make the right interest rate decision when you know the changes in inflation and the expectations regarding future inflation, the changes in the money stock, economic growth and unemployment. You have to choose whether to lower or raise the policy rate or keep it unchanged. Good luck in your decision-making!

Lowering the interest rate increases consumption and borrowing opportunities, and thus accelerates inflation. Raising the interest rate, in turn, reins in consumption and borrowing opportunities, and thus slows inflation.

In making the decision, keep in mind that the primary objective of the ECB's monetary policy is to maintain price stability in the euro area, thereby safeguarding the purchasing power of the euro. Price stability is defined as a year-to-year increase in consumer prices of below 2%, and price stability is to be maintained over the medium term.

[Missing text '/economyassignmentblock/question' for 'English']: 1/6

Inflation has slowed from 2% to 1%, and inflation expectations and the pace of monetary expansion suggest an even lower rate of inflation in coming years. However, economic growth has picked up and unemployment has declined from 5% to 4%. What would you do if you, instead of the Governing Council of the ECB, could decide what to do about the central bank's policy rate?

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Inflation has accelerated from 2% to 7%, inflation expectations are on the increase and the pace of monetary expansion continues picking up. Economic growth has also strengthened, and unemployment has declined from 5% to 4%. What would you do?

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Inflation has accelerated from 2% to 3%, and inflation expectations and the money stock in the economy are growing rapidly. However, economic growth has slowed and unemployment has increased from 5% to 5½%. What would you do?

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Inflation has remained close to 2% for several months in a row, and future inflation expectations are at the same level. Economic growth has decelerated and unemployment has risen from 5% to 6%. The pace of monetary expansion has already for long been in line with the reference value set for monetary growth by the Governing Council of the ECB. What would you do?

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Inflation has picked up from 2% to 4%, and inflation expectations are still on the increase. At the same time, the pace of monetary expansion has accelerated. However, economic growth has decelerated and unemployment has risen from 5% to 6%. You get a call from the Head of State of a large euro area country, urging you to lower the policy rate, as he considers it the only means to regain momentum in the economy in Europe as a whole. What would you do?

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Inflation has slowed, as expected, because of a temporary fall in the price of oil, but future inflation expectations have remained at about 2%. The money stock in the economy has already for long expanded in line with the reference value. At the same time, economic growth has slowed, with unemployment remaining unchanged at 5%. What would you do?

You answered correctly:

NB! You can check the correct answers for each question

Assignment 4/4:

What is the interest rate?

Borrowing money is not free of cost. In addition to the obligation to repay the borrowed money, interest is also normally paid on a loan. The interest is the price of borrowing money.

Central banks have a role to play in steering the interest rate level. In the euro area, for example, the Governing Council of the European Central Bank, of which the Governor of the Bank of Finland is also a member, decides on the Eurosystem's policy rates (ie the key ECB interest rates). These interest rates steer the level of market interest rates, such as Euribor rates.

The chart shows the development of the ECB's policy rate and certain market interest rates in 2005–2012.

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[Missing text '/economyassignmentblock/question' for 'English']: 1/9

The ECB's policy rates declined in autumn 2008. What happened to Euribor rates?

[Missing text '/economyassignmentblock/question' for 'English']: 2/9

Which of the following arguments is not true according to the chart?

[Missing text '/economyassignmentblock/question' for 'English']: 3/9

What was the level of the ECB's policy rate in summer 2010, according to the chart?

[Missing text '/economyassignmentblock/question' for 'English']: 4/9

What does the ECB's policy rate mean?

The ECB or other euro area national central banks do not lend money to private persons.

[Missing text '/economyassignmentblock/question' for 'English']: 5/9

Who decides the level of Eurosystem policy rates?

[Missing text '/economyassignmentblock/question' for 'English']: 6/9

What are the effects of an interest rate increase?

[Missing text '/economyassignmentblock/question' for 'English']: 7/9

Which of the following is the ECB's policy rate?

The Euribor is a market interest rate. The prime rate is banks' own reference rate. The Ministry of Finance confirms the base rate in Finland.

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What will happen to interest rates if inflation is to accelerate in the euro area?

The aim of the Governing Council of the ECB is to keep the price level stable. Therefore, an acceleration of inflation will be addressed using the policy rate. Raising the interest rate reins in consumption and borrowing opportunities, and thus slows inflation. It may therefore be the right solution if the objective of price stability is jeopardised. Lowering the interest rate increases consumption and borrowing opportunities, and thus accelerates inflation.

[Missing text '/economyassignmentblock/question' for 'English']: 9/9

How often, as a rule, does the Governing Council of the ECB decide what to do about the policy rates?

You answered correctly:

NB! You can check the correct answers for each question

Introductory

Assignment 1/4

The Governing Council of the ECB decides on interest rates

Assignment 2/4

Prices under control

Assignment 3/4

Test whether you would make a good central bank governor!

Assignment 4/4

What is the interest rate?