3) Monetary Policy - MB

Question 1

Define monetary policy

Answer 1

Decisions made by the government regarding monetary variables such as money supply and interest rates

Question 2

Define money supply

Answer 2

The quantity of money that is in circulation in the economy

Question 3

What does the central bank do?

Answer 3

The banker to the government, performing a range of functions, which may include issue of coins and banknotes, acting as banker to commercial banks and regulating the financial system

Question 4

What is the Bank of England?

Answer 4

The UK’s central bank

Question 5

What is the transmission mechanism of monetary policy?

Answer 5

The channel by which monetary policy affects aggregate demand

Question 6

What is inflation targeting?

Answer 6

An approach to monetary policy in which the central bank is given independence to set interest rates in order to meet an inflation target

Question 7

What is the Monetary Policy Committee (MPC)?

Answer 7

The body within the Bank of England responsible for the conduct of monetary policy

Question 8

What does MPC stand for?

Answer 8

Monetary Policy Committee

Question 9

What is the bank rate?

Answer 9

The interest rate that is set by the MPC in order to influence inflation

Question 10

What is the liquidity trap?

Answer 10

A situation in an economy when interest rates can fall no further, and monetary policy cannot influence aggregate demand

Question 11

What is quantitative easing?

Answer 11

A process by which liquidity in the economy is increased when the central bank purchases assets from the commercial banks

Question 12

What does liquidity mean? (Google)

Answer 12

The availability of liquid assets (cash) to a market or company

Question 13

What does monetary policy consist of?

Answer 13

Money supply and quantitative easing

Question 14

What is the main tool of monetary policy?

Answer 14

The interest rate

Question 15

How do interest rate changes work?

Answer 15

It’s through aggregate demand via investment and consumption, and indirectly via the exchange rate

Question 16

Who has the responsibility for saying the interest rate?

Answer 16

The Bank of England’s Monetary Policy Committee has the responsibility for setting the interest rate

Question 17

What measures do the Bank of England’s Monetary Policy Committee take to set the interest rate at the right level?

Answer 17

at such a level as to achieve the government’s inflation target, taking account of the general domestic and international economic environment

Question 18

Why can monetary policy not only focus on meeting the inflation target?

Answer 18

It must also operate with an awareness of other developments in the macroeconomy, such as changes in: financial markets, the international economy, money and credit, demand and output, the Labour market, costs and prices (eg changes in oil prices)

Question 19

Monetary policy must also operate with an awareness of other developments in the macroeconomy, such as changes in:

Answer 19

financial markets, the international economy, money and credit, demand and output, the Labour market, costs and prices (eg changes in oil prices)