2.3 UNEMPLOYMENT (SOLUTION - MONETARY POLICY) Flashcards
what is the monetary policy
involves managing the money supply and interest rates in order to achieve specific economic objectives and control the economy
what are the 4 key aspects of the monetary policy
1) interest rates
2) money supply control
3) reserve requirements
4) quantitive easing
explain aspect of interest rates (MP)
central banks influence the economy by setting benchmark interest rates, lowering them makes borrowing cheaper which encourages spending and investment while raising them can help control inflation by discouraging borrowing
explain aspect of money supply control (MP)
central banks manage the amount of money circulating in the economy through tools like open market operations where they buy or sell government securities to increase or decrease liquidity
explain aspect of reserve requirements (MP)
central banks may set reserve requirements for commercial banks, determining how much capital they must hold in reserve, adjusting these requirements affects banks lending capacity
explain the aspect of quantitive easing (MP)
in times of economic crisis central banks may engage in QE purchasing financial assets to inject liquidity into the economy and encourage lending and investment
what are the objectives of the monetary policy
- maintain price stability by control inflation levels
- promote economic growth by influencing investment and consumption
- reduce unemployment by stimulating economic activity
- maintain the stability of the national currency, preventing excessive fluctuations in exchange rates that can impact trade and investment
what are the two types of monetary policy
- expansionary
- contractionary
what is expansionary monetary policy
aimed at stimulating economic growth during a recession by increasing the money supply and lowering interest rates
what is contractionary monetary policy
aimed at reducing inflation by decreasing the money supplying raising interest rates when the economy is overheating
advantages of monetary policy
- helps manage inflation
- central banks can quickly implement change
- can reduce unemployment
-not political as the Bank of England is neutral
disadvantages of monetary policy
- can be significant delays between the implementation of the policy and its effects
- can lead to excessive inflation if policy is too expansionary
- changes in IR can disproportionately effect different income groups potentially widening income inequality
- may be ineffective if the animal spirits of firms and comsumers are low
