8.3 Central banks and monetary policy

Question 1

What is monetary policy?

Answer 1

The manipulation of interest rates, exchange rates and money supply to influence the level of economic activity

Question 2

What is the aim of monetary policy?

Answer 2

The key aim of UK monetary policy is to achieve the government’s inflation target of 2%

They will only use monetary policy for other purposes if it doesn’t conflict the inflation objective

Question 3

Who controls monetary policy?

Answer 3

The MPC

Question 4

What impact will changing interest rates have?

Answer 4

Borrowing
Exchange rates
Variable mortgages
Business investment

Question 5

What is quantitative easing?

Answer 5

Where a government purchases bond to inject money into the economy?

Question 6

How does quantitative easing work?

Answer 6

• Government buy bonds
• Demand for bonds increases meaning the interest rates are less of a cost
• banks now have more cash to be leant to consumers and businesses
• Banks then pay lower interest on new or expiring bonds
• Now banks can access cash at a cheaper rate
• New lending will eventually lead to further lending (multiplier)`