3.6 - monetary policy

Question 1

monetary policy

Answer 1

policy that aims to control the total supply of money in the economy to try to achieve the government’s economic objectives, particularly price stability

Question 2

what is a major objective of monetary policy

Answer 2

low and stable rate of inflation

Question 3

why does spending fall when interest rates rise - borrowing by consumer

Answer 3

cost of borrowing rises > discourages consumers from taking out loans to finance their spending

Question 4

why does spending fall when interest rates rise - borrowing by firms

Answer 4

cost of borrowing rises > discourages firms from taking out loans to finance greater investment expenditure.

Question 5

why does spending fall when interest rates rise - saving rises

Answer 5

greater reward for saving > increases incentive to save > discourages consumers from spending

Question 6

why does spending fall when interest rates rise - asset prices fall

Answer 6

less attractive to buy assets e.g housing > fall in house prices > fall in wealth for owners of assets > reduces wealth discourages customer as confidence is lower

Question 7

why does spending fall when interest rates rise - disposable incomes fall for households with mortgages

Answer 7

monthly cost of mortgage repayments rise > leave householders with less disposable income > fall in consumer spending

Question 8

why does spending fall when interest rates rise - external value of currency rises

Answer 8

rise in interest rates tends to raise the external values of the currency > imports cheaper > reduces inflation