3) Monetary Policy - MB Flashcards
Define monetary policy
Decisions made by the government regarding monetary variables such as money supply and interest rates
Define money supply
The quantity of money that is in circulation in the economy
What does the central bank do?
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
What is the Bank of England?
The UK’s central bank
What is the transmission mechanism of monetary policy?
The channel by which monetary policy affects aggregate demand
What is inflation targeting?
An approach to monetary policy in which the central bank is given independence to set interest rates in order to meet an inflation target
What is the Monetary Policy Committee (MPC)?
The body within the Bank of England responsible for the conduct of monetary policy
What does MPC stand for?
Monetary Policy Committee
What is the bank rate?
The interest rate that is set by the MPC in order to influence inflation
What is the liquidity trap?
A situation in an economy when interest rates can fall no further, and monetary policy cannot influence aggregate demand
What is quantitative easing?
A process by which liquidity in the economy is increased when the central bank purchases assets from the commercial banks
What does liquidity mean? (Google)
The availability of liquid assets (cash) to a market or company
What does monetary policy consist of?
Money supply and quantitative easing
What is the main tool of monetary policy?
The interest rate
How do interest rate changes work?
It’s through aggregate demand via investment and consumption, and indirectly via the exchange rate
Who has the responsibility for saying the interest rate?
The Bank of England’s Monetary Policy Committee has the responsibility for setting the interest rate
What measures do the Bank of England’s Monetary Policy Committee take to set the interest rate at the right level?
at such a level as to achieve the government’s inflation target, taking account of the general domestic and international economic environment
Why can monetary policy not only focus on meeting the inflation target?
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)
Monetary policy 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)
