Certified Financial Management Specialist Practice Exam

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Prepare for the Certified Financial Management Specialist Exam with multiple choice questions and detailed explanations. Enhance your skills and ensure success on your exam!

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What is the main effect of expansionary monetary policy?

  1. It reduces the money supply and increases interest rates

  2. It encourages saving by increasing rates

  3. It lowers interest rates and increases the money supply

  4. It decreases inflation by reducing spending

The correct answer is: It lowers interest rates and increases the money supply

Expansionary monetary policy primarily aims to stimulate economic growth by increasing the money supply. When a central bank implements this kind of policy, it typically lowers interest rates, making borrowing cheaper for consumers and businesses. This reduction in interest rates encourages individuals and companies to take loans, which in turn spurs spending and investment in the economy. As more money circulates through the economy due to increased lending and spending, the overall money supply rises. This influx of capital can lead to higher demand for goods and services, promoting business expansion and potentially leading to job creation. The primary goal of expansionary monetary policy is to combat unemployment and foster economic conditions conducive to growth, especially during periods of recession or economic slowdown. In contrast, other options present scenarios that are not aligned with the objectives of expansionary monetary policy. Reducing the money supply and increasing interest rates is typically an aspect of contractionary monetary policy, which aims to cool off an overheating economy. Encouraging saving by increasing rates also runs counter to the goal of stimulating spending and investment. Finally, decreasing inflation by reducing spending relates to tightening the monetary policy, which is not the focus of expansionary measures.