3.6 Monetary Policy

Question 1

Monetary policy

Answer 1

A policy that aims to control the total supply of money in the economy to try to achieve the governments economic objectivess, particularly price stability

Question 2

What is the major objective of monetary policy

Answer 2

to keep a low and stable rate of inflation

Question 3

what are the 4 main aims of monetary policy

Answer 3

• Economic growth
• Low unemployment
• Price stability
• A balance in the balance of payments

Question 4

Who decides interest rates

Answer 4

MPC

Question 5

How can you achieve economic growth with interest rates

Answer 5

Lower interest rates
Increased spending
Increased output + Employment

Question 6

How can you achieve low unemployment with interest rates

Answer 6

Lower interest rates
Increased spending
Increased output + Employment

Question 7

How can you achieve Price stability with interest rates

Answer 7

Reduced spending
More price stability

Question 8

How can you achieve A healthier balance of payments with interest rates

Answer 8

Increase interest rates
Reduced spending
including spending on imports

Question 9

What is the effect of interesting rates falling

Answer 9

• Borrowing by consumer rises
• Borrowing by firms rises
• Saving falls
• Asset prices rises (because it becomes more attractive to purchase assets like housing)
• Disposable incomes rise for people with mortgages rises
• The external value of the currency falls (it is less attractive to save in the uk)

Question 10

What is the effect of interest rates rising (5)

Answer 10

• Borrowing by consumers fall
• Borrowing by firms fall
  Saving rises
• Asset prices fall
• Disposable income for houses with mortgages falls
• External value of currency rises (More demand to save)

Question 11

Evaluate the effect of monetary policy on Consumer spending

Answer 11

• People may be saving for a specific reason and will continue to save even if interest rates decrease
• People with low incomes may not have the means to save more if interest rates rise
• Different consumers could be affected to a different degree: 37.5% of people have a mortgage, so interest rates will affect them more than people who rent
• Consumer confidence: Those who have low confidence may still not take out loans even if interest rates are low

Question 11

What is important to consider when evaluating Monetary policy

Answer 11

• Business confidence
• Consumer confidence