2.1.2 Monetary Policy Flashcards
What is monetary policy
Use of interest rates and the money supply to control the AD in the economy
What are interest rates and reasons for it
Is in the price paid to lenders for borrowed money
Different banks charge different rates to compete with eachother
Rates are higher if money is borrowed with no security
Role of central banks
Implements the governments monetary policy
Controls inflation and stablisies nations currency
Contractionary and expansionary
Contarctionary is when there is increase in interest rates to reduce consumer borrowing and encourage saving this will increase exchange rates and reduce prices of imported products
Expansionary when the government reduces interested rates to increase spending and decrease saving
Impact on inflation
Comes from money supply growing too quick
Raising interest rates will cause borrowing to fall so money supply grows less quickly
Impact on economic growth
Reduce interest rates to increase spending do more output and more GDP
May lead to inflationary pressure
Impact on current balance
Demand for currency will increase if interest rate increases. Currency will appreciate so price of exports may increase therefore demand for exports will decrease. Leading to deficit
Impact of Monterey on consumers
When interest rates fall demand for loans from households will rise. Consumers will borrow money and spend it. When interest rates fall mortgage payments fall so more money to spend.
Impact on firms
Lower interest rates will boost profit because costs are lower so this will increase business confidence and stimulate more investment
If exchange rate falls, price of exports are cheaper so demand for them will rise
The use of asset purchasing by central banks
Using quantitative easing ( buying financial assets which resulted in money flow from central bank to commercial) the extra cash will be used to make loans for consumers and businesses to increase AD
