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Economics unit 2 > 19)demand Management (2): Monetary Policy > Flashcards

19)demand Management (2): Monetary Policy Flashcards

0
Q

What does interest rates mean

A

⚫️cost of borrowing

⚫️reward of savings

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1
Q

What does monetary policy mean

A

⚫️use of interest rate and money supply
➡️to manipulate the level of AD in the economy

⚫️controlled by the bank of England

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2
Q

What other roles do the bank of England have

A

⚫UKs central bank

⚫️decides on the amount of money in circulation
➡️and issues bank notes

⚫️banker of the Government

⚫️ banker to the banking system
➡️will act as lender of last resort when bankrupt

⚫️manages the countries gold and foreign currency reserves

⚫️regulates the UKs banking and financial system

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3
Q

What does base rate mean

A

the minimum rate of borrowing in the economy

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4
Q

How long does it take for interest rate to fully feed through into the economy

A

12-24 months

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5
Q

What piece of info does the MPC need to consider to help it to predict inflation in 12-24 months

A

⚫️unemployment statistics

⚫️sales of UK exports

⚫️government spending plans

⚫️wage rate rises

⚫️consumer and business confidence surveys

⚫️cost of raw materials

⚫️asset prices

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6
Q

Why is unemployment statistics help it to predict inflation in 12-24 months

A

⚫️if unemployment is low
➡️this could lead to cost-push pressures
➡️as firms have to offer higher wages to attract workers

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7
Q

Why is sales of UK exports help it to predict inflation in 12-24 months

A

⚫️An increase in demand for UK exports
➡️will increase AD
➡️putting pressure on price level

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8
Q

Why is government spending plan help it to predict inflation in 12-24 months

A

⚫️an increase in government spending
➡️increase AD
➡️increase the price level

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9
Q

Why is a rise in wage rate help it to predict inflation in 12-24 months

A

⚫️a large increase in national minimum wage
➡️lead to increase cost of production
➡️shifting AS to the left
➡️causing cost-push inflation

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10
Q

Why will consumer and business confidence survey help it to predict inflation in 12-24 months

A

⚫️if consumers or firms worried about the future
➡️they may cut down on their spending plans
➡️leading to a reduction in C and I
➡️a fall in AD
➡️a reduction in price level

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11
Q

Why is the cost of raw materials help it to predict inflation in 12-24 months

A

⚫️a rise in oil of gas prices
➡️lead to cost-push inflation
➡️due to increase costs of production for firms

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12
Q

Why is the asset prices help it to predict inflation in 12-24 months

A 
⚫️a decrease in house prices
➡️mean people who own such asset will feel poorer
➡️wealth effect
➡️may cut back spending plans
➡leading to fall in C
➡️decrease in AD
➡️reduce price level
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13
Q

What are all interest rate decisions based on

A

Forecasts of the future

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14
Q

What will happen if data suggests that forecast inflation will rise above the 2% target

A

⚫️MPC will consider tightening monetary policy

➡️by increasing interest rates

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15
Q

What will happen if data suggests that forecast inflation will fall below the 2% target

A

⚫️MPC will consider loosening monetary policy

➡️by reducing interest rates

16
Q

What does tight MPC mean

A

An increase in interest rate

17
Q

What will happen if theres an increase in interest rate

A 
⚫️leads to leakage of 
➡️consumption
➡investment
➡️net export
⚫️AD will shift to the left

⚫️if they forecast that inflation rising above target
➡️the MPC will use this to slow growth of the economy

18
Q

What is a loose monetary policy

A

Reduction in the interest rate

19
Q

What will happen if interest rate decreases

A 
⚫️lead to injection of extra
➡️investment
➡️consumption
➡️net export
⚫️AD will shift to the right

⚫️if MPC forecast that inflation is falling below target
➡theyll use this to boost the economy

20
Q

What does the interest rate have an impact on

A

⚫️exchange rate

⚫️firms

⚫️savers

⚫️borrowers

21
Q

How does the interest rate increasing have an impact on the borrowers

A

⚫️mortgage interest payments rise

⚫️households with mortgages have less money to spend

⚫️wealth effect
➡️demand for houses falls
➡️house prices fall
➡️home owners feel less worthy
➡️consumption falls
➡️AD shifts to the left
➡️price level and inflation falls
22
Q

How does the interest rate increasing have an impact on the savers

A

➡️saving becomes more attractive

➡️more income is saved

➡️less is spend

➡️consumption decreases

➡️AD shifts to left

➡️price and inflation decreases

23
Q

How does the interest rate increasing have an impact on the exchange rate

A

➡️uk becomes more attractive place to save

➡️hot money flows into the UK

➡️demand for £ increases

➡️value of the £ increases

➡️UK exports become more expensive

➡️net export decreases

➡️AD shifts to the left

➡️price level and inflation decreases

24
Q

What is the impact of tight monetary policy on AD and inflation

A

➡️AD decreases

➡️inflation decreases

25
Q

What is the impact of loose monetary policy on AD and inflation

A

➡️AD will increase

➡️inflation will increase

26
Q

Why is monetary policy effective

A

⚫️interest rate can respond quickly to the problems in the economy

⚫️changes in the interest rate have large impacts on consumption and investment

⚫️long run impact on investment and AS

⚫️An independant bank will be tough on inflation

27
Q

How is interest rate responding quickly to problems in the economy effective for monetary policy

A

⚫️MPC of bank of England meets monthly
➡️can raise/lower interest rate immediately as it wishes
❎fiscal policy on the other hand, is changed once a year on budget day

28
Q

How is changes in interest rate having a large impact on consumption and investment effective for monetary policy

A

⚫️has large impact on AD and economy

⚫️changes in any demand management policies like fiscal policy and monetary policy
➡️have big impact on AD and economy
➡️because of multiplier effect

➡️describe multiplier with example n formula

29
Q

How is long run impact on investment and AS effective for monetary policy

A

⚫️if interest rate decreases

➡️AD will increase in short run
➡️as investment increases

➡️this could also shift AS in the long run
➡️as capital stock is updated
➡️becomes more productive
➡️increasing quality of nations factor of production and its ability to produce goods

30
Q

What are the limitations of monetary policy

A

➡️time lags

➡️magnitude

➡️fixed rate mortgages and loans

31
Q

Why is time lags a limitation of monetary policy

A 
⚫️changes in the interest rate takes a long time to feed through 
➡️consumption
➡️investment
➡️AD
➡️economy transmission mechanism
➡️takes between 12-24 months

⚫️thus bank of England
➡️emphasises regular small changes in interest rate

32
Q

Why is the magnitude a limitation of the monetary police

A

⚫️impact on economy depends on magnitude on interest rate
➡️MPC usually raises/lowers rates by only 0.25%
➡️unlikely to have major impact on economy
➡️on its own in the short run

33
Q

Why is fixed rate mortgages and loans a limitation of monetary policy

A

⚫️interest rate changes may not have much effect on
➡️households that have fixed rate mortgages and loans

⚫️fixed rate mortgages
➡️becoming increasingly popular in Uk over last decade

⚫️household on variable rate mortgages and loans
➡️will be immediately affected when interest rate changes

Economics unit 2 (21 decks)

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