4) Monetary Policy 2 -MB (watch a Video On Interest Rates And Quantative Easing) Flashcards
If interest rates increase from 4% -> 4.25% how does this link to the official rate ?
Official rate -> bank rate: 4% -> 4.25%
If interest rates increase from 4% -> 4.25% what happens to market rates?
increases the rate of borrowing (more expensive to borrow money, can afford to borrow less), mortgages become more expensive
Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens to asset prices ?
They decrease as people can’t afford what they could
Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens to expectations/confidence?
They decrease, less confidence as asset prices have fallen
Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens to domestic demand?
It decreases as it is more expensive to borrow
Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens to domestic inflationary pressure?
It decreases as demand falls, which reduces inflationary pressure
Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens to inflation?
Inflation should fall? Ask Sir
What makes up total demand?
Domestic demand and net external demand
Which countries are very safe to put your money in?
Britain, USA, Germany, Japan
Eg the Bank of England’s Monetary Policy Committee increase the interest rate from 4% to 4.25%, what happens?
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????
When was Quantitative Easing introduced?
With the advent of the financial crisis in the late 2000s, a new approach was needed
Why was Quantitative easing introduced?
To help manage an economy in recession
What is a basic definition of quantitative easing?
Temporary extra money supply
What does FDI stand for?
Foreign Direct Investment
1) What is the first step of Quantitative Easing?
1) Bank of England asset purchases - creates money and uses it to buy assets
2) What does Bank of England Assert Purchases cause?
This causes - confidence, policy signaling, portfolio rebalancing, market liquidity, money (cash money in banks/pensions)
3) What does confidence, policy signaling, portfolio rebalancing, market liquidity, money (cash money in banks/pensions) lead to?
Determining Asset Prices and Exchange rates, and money leads to Bank lending
4) What does determining asset prices and exchange rates due to quadratic reading leads to?
An increase in total wealth and decrease in the cost of borrowing, you are increasing the amount of money in the economy
5) What effect does Quantitative Reading have on spending and income?
spend more as income has increased
Through quantative easing you can…
Cut inflation by destroying money????
How does Quantitative Easing work?
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
