2.6.2 Monetary policy

Question 1

What is monetary policy + its main aims?

Answer 1

Concerned with managing AD and achieving the macro objectives using Interest rates and QE.

Main aims are low inflation and financial stability in economy.

Question 2

What is deflationary monetary policy?

Answer 2

INCREASING INTEREST RATES IN A BOOM
* decrease disposable income (higher cost of borrowing/mortgages)
* Less incentive to borrow
* consumption DECREASE
* savings INCREASE
achieves a lower inflation

SHIFTS AD TO LEFT!

Question 3

what is an expasionary monetary policy?

Answer 3

DECREASE INTEREST RATES /+ QUANTATIVE EASING IN A RECESSION
* cost of borrowing cheaper = more disposable income
* more consumption
* less saving more spending
achieves a higher inflation

SHIFTS AD TO RIGHT!

Question 4

What is quantative easing?

Answer 4

When BoE buys bonds (with “fake” money) from banks/govt to inject money into economy.
reduces demand for govt bonds forcing demand into other areas.

Question 5

Who decides the interest rates / runs BoE / employs MPC

Answer 5

Governer of BoE - along with the MPC decides monetary policy instruments.