3.2 - monetary policy

Question 1

Aim of monetary policy

Answer 1

To influence AD and control the money supply

Question 2

Monetary policy tools

Answer 2

Changing interest rate
Inflation targets
Quantitative easing
Manipulating exchange rates

Question 3

Inflation targets

Answer 3

Set targets to ensure low / stable inflation - macroeconomic objective

Question 4

Quantitative easing

Answer 4

Increasing money supply by creating virtual money
Use this money to buy government bonds

Question 5

Aim of quantitative easing

Answer 5

Encourage bank lending + investment

Question 6

Strengths of inflation targets

Answer 6

Avoids booms + busts in economy
Benefits of low inflation

Question 7

Weaknesses of inflation targets

Answer 7

Conflict with economic growth
Some economies may benefit from higher inflation

Question 8

Strengths of QE

Answer 8

Increases the money supply - rises AD
Encourages investment

Question 9

Weaknesses of QE

Answer 9

Risk of demand pull inflation
Borrowing may not increase if consumer confidence is low