2.6.2 Intro to Monetary Policy

Question 1

what is monetary policy

Answer 1

involves changes in interest rates, the supply of money and exchange rates by the central bank to influence aggregate demand and achieve the macroeconomic objectives

Question 2

is monetary policy a government policy

Answer 2

no

Question 3

what is a central bank

Answer 3

• the monetary authority and major regulatory bank in a country
• they set the base rate

Question 4

give three examples of central banks

Answer 4

• UK: Bank of England
• US: Federal Reserve
• EU: European Central Bank

Question 5

what are the main objectives of monetary policy in the UK

Answer 5

• to control inflation by making interest rate decisions independently from the government
• meet inflation target of 2%

Question 6

what are the main objectives of monetary policy in the US

Answer 6

has a dual mandate:
- achieve price stability
- achieve highest level of employment

Question 7

what is contractionary monetary policy

Answer 7

aims to reduce AD by increasing interest rates or reducing the money supply

Question 8

what is expansionary monetary policy

Answer 8

aims to increase AD by decreasing interest rates or increasing the money supply

Question 9

what are the three tools monetary policy uses

Answer 9

• interest rates
• quantitative easing
• exchange rates