1. Macroeconomic Policy - Monetary Policy

Question 1

What is monetary policy?

Answer 1

Economic policy that uses monetary instruments to achieve policy objectives. Through the manipulation of interest rates, money supply, and exchange rates.

Question 2

Prior to 1997 who made up the monetary authorities?

Answer 2

The Treasury and the bank of England now it is just in the Bank of England.

Question 3

What are the Bank of England?

Answer 3

They are the central bank.

Question 4

What is the main monetary policy objective?

Answer 4

To control inflation.

Question 5

What is the inflation rate target for the Bank of England?

Answer 5

2% however there are allowing 1% either way.

Question 6

How is inflation measured?

Answer 6

Using the consumer price index otherwise known as CPI, it used to be the RPI.

Question 7

Which part of the Bank of England attempt to control inflation rates?

Answer 7

The monetary policy committee implement monetary policy to try and achieve this.

Question 8

What is the Bank of England is mean monetary policy instrument?

Answer 8

The base rate.

Question 9

How often is the base rate adjusted?

Answer 9

Every month.

Question 10

What does the Bank of England promised to do for High Street banks?

Answer 10

They will lend large amounts to the banks if there are large unexpected withdrawals to maintain liquidity.

Question 11

What happened in the credit crunch?

Answer 11

The base rate went down the interest rate stayed same because banks didn’t want to lend in a risky financial climate.

Question 12

What components of aggregate demand does monetary policy effect?

Answer 12

It effects consumer spending, investment as well as imports and export.

Question 13

What does contractionary monetary policy do?

Answer 13

It takes aggregate demand out of the economy. This will shift aggregate demand left and reduce inflation but it depends on where on the short run aggregate supply you are. It will also decrease total output.

Question 14

What are the three key ways lower interest rates will reduce inflation?

Answer 14

Reducing household consumption.Reducing business investment.Affecting imports and exports through the exchange rate.

Question 15

How is household consumption reduced?

Answer 15

Interest rates up, saving up, consumption down.Interest rates up, asset prices down, personal wealth down, consumption down.Interest rates up, asset prices down, consumer confidence down, consumption down.

Question 16

How is business investment reduced?

Answer 16

Interest rates up, borrowing costs up, buying capital goods down, business confidence down, investment down.

Question 17

How are imports and exports affected through the exchange rate?

Answer 17

Interest rates up, demand for pounds up, exchange rate of the pound up, UK exports price competitiveness down, BoP worsens, aggregate demand down.

Question 18

What does expansionary monetary policy day?

Answer 18

It puts aggregate demand into the economy. This will shift aggregate demand right and increase inflation but it depends on where on the short run aggregate supply you are. It will also increase total output.

Question 19

How does expansionary monetary policy affect inflation and angry demand?

Answer 19

For the analysis chains of expansionary monetary policy apply the same rules as contractionary monetary policy in reverse. (See previous cards)

Question 20

What are the evaluation points for monthly policy?

Answer 20

In 1998 the Bank of England were given autonomy so have less political influence.From 1998 to 2007 invitation stayed within 1% and 3%. They can be changed monthly so is flexible.It’s a blunt tool so you have to except negative trade-offs.It’s difficult to be accurate as you’re predicting 18 to 24 months ahead.

Question 21

What is quantitative easing?

Answer 21

Banks create a new electronic money they then by government bonds and bonds of banks. This provides them with more money the public spend this money so aggregate demand goes up and and asset prices go up, long-term interest rates go down but it makes people feel wealthier so aggregate demand goes up.