3.5: Monetary Policy

Question 1

Demand side policies

Answer 1

Aims to reduce short-run fluctuations of the business cycle and bring AD as close to potential GDP as possible

Question 2

Monetary policy

Answer 2

Enacted by the central bank and involves the changes in money supply and interest rates to influence AD, subsequently fulfilling macroeconomic objectives

Question 3

Central bank

Answer 3

The monetary authority responsible for an economy’s monetary policy and financial system regulation.

Question 4

Commercial banks

Answer 4

Private or public financial institutes whose main functions are to hold deposits for customers (consumers and firms), to make loans, transfer funds, and to buy government bonds.

Question 5

Interest rates

Answer 5

The cost of borrowing and reward for saving of money, expressed as a percentage.

Question 6

Money supply

Answer 6

The amount of money circulating in the economy, which includes notes and coins, loans, credits and deposits.

Question 7

Expansionary monetary policy

Answer 7

Stimulates the economy by increasing money supply and reducing interest rates, increasing C and I, hence increasing AD

Question 8

Contractionary monetary policy

Answer 8

Stimulates the economy by decreasing money supply and increasing interest rates, decreasing C and I, hence decreasing AD