3.2 Monetary Policy

Question 1

What is the definition of money ?

Answer 1

Money can be anything that people regularly use to buy G/S and for the repayment of debts

Question 2

What are the functions of money ?

Answer 2

1. medium of exchange - it allows us to buy and sell G/S that we want, this allows trade and specialisation, without money we would have a barter system which leads to double coincidence of wants
2. store of value - households can *store wealth** in the form of money, the value of money can be maintained and held for the future
3. unit of account - money acts a measure of value, it would be hard to have an agreed unit of account in a barter system since different people value money differently
4. standard for deferred payments - money is crucial for lending and borrowing

Question 3

What are the Characteristics of money ?

Answer 3

To be used as money, a commodity needs to have the followings characteristics:
- portable (ideally have low weight)
- divisible (into smaller units without loss of value
- durable (non-perishable)
- difficult to forge

Question 4

What is the definition of monetary policy ?

Answer 4

• monetary policy involves the manipulation of the bank rate, the supply of money or the exchange rate (with fixed exchange rate), to influence economic performance
• monetary policy in most countries is conducted by the central bank

Question 5

What are the roles of the Bank of England ?

Answer 5

• it acts the governments bank
• it acts as the lender of last resort
  The main role however is to conduct monetary policy