Central Banks and Their Role in Forex Markets MCQs

MCQs on Central Banks and Their Role in Forex Markets

1. What is the primary role of a central bank?
A) To manage the stock market
B) To regulate and control the nation’s money supply
C) To set prices for goods
D) To tax citizens
Answer: B) To regulate and control the nation’s money supply

2. Which of the following is a function of a central bank?
A) Issuing currency
B) Setting fiscal policy
C) Managing foreign trade
D) Regulating private companies
Answer: A) Issuing currency

3. How do central banks influence interest rates?
A) By controlling the supply of money in the economy
B) By setting prices for consumer goods
C) By directly determining exchange rates
D) By changing tax rates
Answer: A) By controlling the supply of money in the economy

4. What is a currency peg?
A) A method to tie a country’s currency value to another currency
B) A type of interest rate set by the central bank
C) A trade agreement between countries
D) A restriction on foreign exchange trading
Answer: A) A method to tie a country’s currency value to another currency

5. Why do traders watch central bank announcements closely?
A) They can indicate potential changes in monetary policy and affect currency values
B) They have no effect on trading
C) They only affect stock market prices
D) They are irrelevant in forex trading
Answer: A) They can indicate potential changes in monetary policy and affect currency values

6. What is the term for when a central bank sells or buys its own currency to influence its value?
A) Currency trading
B) Open market operations
C) Foreign exchange intervention
D) Fiscal policy
Answer: C) Foreign exchange intervention

7. Which central bank is responsible for the Euro?
A) The Federal Reserve
B) The European Central Bank (ECB)
C) The Bank of England
D) The Bank of Japan
Answer: B) The European Central Bank (ECB)

8. What is the impact of a central bank raising interest rates?
A) It usually leads to a stronger currency
B) It usually leads to a weaker currency
C) It has no effect on the currency
D) It only affects inflation rates
Answer: A) It usually leads to a stronger currency

9. What is the role of the Federal Reserve in the United States?
A) To control the fiscal policy of the government
B) To regulate the stock market
C) To manage the money supply and set interest rates
D) To issue government bonds
Answer: C) To manage the money supply and set interest rates

10. How does a central bank use “quantitative easing”?
A) By raising interest rates to control inflation
B) By increasing the money supply to stimulate the economy
C) By selling government bonds to reduce money supply
D) By restricting access to foreign currencies
Answer: B) By increasing the money supply to stimulate the economy

11. Which of the following can affect a central bank’s decision-making?
A) Inflation rates
B) Unemployment rates
C) Economic growth indicators
D) All of the above
Answer: D) All of the above

12. What is the purpose of a central bank’s reserve requirements?
A) To control inflation
B) To ensure banks have enough liquidity to meet customer demands
C) To influence the stock market
D) To regulate foreign trade
Answer: B) To ensure banks have enough liquidity to meet customer demands

13. What can happen if a central bank lowers interest rates?
A) It can stimulate economic growth by making borrowing cheaper
B) It can lead to higher inflation
C) It can weaken the currency
D) All of the above
Answer: D) All of the above

14. What does the term “independence” mean in relation to central banks?
A) They are not influenced by political pressures in their decision-making
B) They operate independently from the country’s government
C) They have no ties to international banking systems
D) Both A and B
Answer: D) Both A and B

15. What is a major risk for central banks when setting interest rates?
A) Misjudging inflation levels
B) Too much transparency
C) Increased public trust
D) High employment rates
Answer: A) Misjudging inflation levels