4) Monetary Policy 2 -MB (watch a Video On Interest Rates And Quantative Easing)

Question 1

If interest rates increase from 4% -> 4.25% how does this link to the official rate ?

Answer 1

Official rate -> bank rate: 4% -> 4.25%

Question 2

If interest rates increase from 4% -> 4.25% what happens to market rates?

Answer 2

increases the rate of borrowing (more expensive to borrow money, can afford to borrow less), mortgages become more expensive

Question 3

Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens to asset prices ?

Answer 3

They decrease as people can’t afford what they could

Question 4

Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens to expectations/confidence?

Answer 4

They decrease, less confidence as asset prices have fallen

Question 5

Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens to domestic demand?

Answer 5

It decreases as it is more expensive to borrow

Question 6

Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens to domestic inflationary pressure?

Answer 6

It decreases as demand falls, which reduces inflationary pressure

Question 7

Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens to inflation?

Answer 7

Inflation should fall? Ask Sir

Question 8

What makes up total demand?

Answer 8

Domestic demand and net external demand

Question 9

Which countries are very safe to put your money in?

Answer 9

Britain, USA, Germany, Japan

Question 10

Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens?

Answer 10

1) Official rate: bank rate 4%-4.25%
2) Market rates: increases the rate of borrowing (more expensive to borrow money, can afford to borrow less), mortgages become more expensive
3) Asset Prices: decrease as people can’t afford what they could
4) Expectations/confidence: decreases, less confidence as asset prices have fallen
5) Domestic Demand: decreases as it is more expensive to borrow
6) Net External demand:
7) Domestic inflationary pressure: decreases as demand falls, which reduces inflationary pressure
8) Inflation should fall????

Question 11

When was Quantitative Easing introduced?

Answer 11

With the advent of the financial crisis in the late 2000s, a new approach was needed

Question 12

Why was Quantitative easing introduced?

Answer 12

To help manage an economy in recession

Question 13

What is a basic definition of quantitative easing?

Answer 13

Temporary extra money supply

Question 14

What does FDI stand for?

Answer 14

Foreign Direct Investment

Question 15

1) What is the first step of Quantitative Easing?

Answer 15

1) Bank of England asset purchases - creates money and uses it to buy assets

Question 16

2) What does Bank of England Assert Purchases cause?

Answer 16

This causes - confidence, policy signaling, portfolio rebalancing, market liquidity, money (cash money in banks/pensions)

Question 17

3) What does confidence, policy signaling, portfolio rebalancing, market liquidity, money (cash money in banks/pensions) lead to?

Answer 17

Determining Asset Prices and Exchange rates, and money leads to Bank lending

Question 18

4) What does determining asset prices and exchange rates due to quadratic reading leads to?

Answer 18

An increase in total wealth and decrease in the cost of borrowing, you are increasing the amount of money in the economy

Question 19

5) What effect does Quantitative Reading have on spending and income?

Answer 19

spend more as income has increased

Question 20

Through quantative easing you can…

Answer 20

Cut inflation by destroying money????

Question 21

How does Quantitative Easing work?

Answer 21

1) Bank of England asset purchases - creates money and uses it to buy assets
2) This causes - confidence, policy signaling, portfolio rebalancing, market liquidity, money (cash money in banks/pensions)
3) leads to asset prices and exchange rate, and money leads to bank lending
4) causes total wealth to increase as you are increasing the amount of money in the economy
5) which resulted in spend and income - spend more, income has increased
6) inflation decreased???? Ask sir