4.4 Monetary Policy Measures Flashcards
What is Monetary policy?
Decides on the rate of interest, control of the exchange rate and the money supply to influence aggerate deman.
What is the interest rates?
The reward for saving and the cost of borrowing.
What is the money supply?
The amount of money in an economy at any given time. Consist of coins, bank notes bank deposits and central bank reserves
What is the central bank responsible for?
Setting monetary policy
What are the three main instruments of Monetary policy?
Interest rates: Incremental adjustments to the interest rates.
Quantitative easing: Increases the supply of money in the economy. The central bank creates new money and uses it to buy open market assests such as bonds when they buy the bond back early there is an injection of new money into the economy.
Exchange rate: Adjustments to the exchange rate. The central bank is able to influence the exchange rate through buying or selling its own currency. This in turn influences the level of exports/imports
What is Expansionary monetary policy?
Expansionary monetary policy isused to generate further economic growth it includes reducing interest rates increase quantitative easing, or depreciating the exchange rate.
What is contractionary Monetary policy?
Used to slow down economic growth or reduce inflation this includes increasing interest rates decrease QE or appreciating the exchange rate
What are the roles of the central bank?
Banker to the government: Tax revenue is paid to the governments account, and payments by the government for goods and services are paid from this account.
Banker to commercial Banks: Holding accounts at the central bank enables commercial banks to settle debts between each, and draw out cash if their customers are taking more cash from their branches than usual.
Lender of last resort: Lend to banks which are temporarily short of cash.
Hold currency reserves: Keeps a stock of its own and foreign currency to influence the exchange rate.
What are the OTHER roles of the central bank? PART 2
Manages the national debt: Carries out borrowing o behalf of the government by issuing government securities, paying interest on them and repaying them when they fall due.
Issues bank notes: Responsible for printing notes and destroying notes which are no longer suitable for circulation
Monetary policy
What are the strengths of monetary policy?
1) Bank of England operates independently .from the Government
2) Is able to consider long term outlook.
3) Targets inflation and maintains stable prices
4) Depreciating the currency can increase exports.
What is the Weakness of Monetary policy?
1) Conflicting goals economic growth caused by lower rates puts upwards pressure on inflation
2) Time lags between policy and the desired impact
3) Firms and consumers may not respond to lower interest rates when confidence is low.
4) Cheaper loans may inflate asset prices in the longer term.
What are the impact of Expansionary monetary policy on consumers?
Spending rises because saving becomes less attractive and borrowing becomes less expensive consumers may also see a reduction in their mortgage and interest rate as their disposable income rises
What are the impact of Expansionary monetary policy on producers?
Firms will borrow more and invest more into new capital because the interest rate will be less output will be increased (better quality more efficient machines).
What are the impact of Expansionary monetary policy on the economy?
The economy will thrive as there is a higher confidence from consumers in the economy because interest rates are lower consumers will spend more and reinvest it into the economy so aggregate demand will increase
What are the impact of Contractionary monetary policy on consumers?
Consumers will save more and borrow less to spend on goods and services in particular luxury goods and services that need to financed
