Central Banks And Monetary Policy

Question 1

Main functions of a central bank

Answer 1

• monetary policy function
• financial stability & regulatory function
• policy operation functions
• debt management

Question 2

What is the central bank’s part in monetary policy

Answer 2

• setting of the main monetary policy interest rate
• QE
• XR

Question 3

What is the central bank’s part in financial stability & regulatory function

Answer 3

• supervision of the wider financial system

- prudential policies designed to maintain financial stability

Question 4

What is the central bank’s part in policy operations

Answer 4

• lender of last resort to the banking system
• managing liquidity
• infrastructure provision
• overseeing the payments systems used by banks / retailers / credit card companies

Question 5

What is the central bank’s part in debt management

Answer 5

Handling the issue and redemption of issues of government debt

Question 6

What is monetary policy

Answer 6

It involves changes in interest rates, the supply of money & credit and exchange rates to influence the economy

Question 7

Monetary policy in the U.K.

Answer 7

The Bank of England is in charge

Question 8

What does monetary stability mean

Answer 8

Stable prices and confidence in the currency

Question 9

What is an expansionary monetary policy

Answer 9

• fall in nominal and real level of interest rates
• measures to expand the supply of credit from the banking system
• depreciation of the external value of the XR

Question 10

Deflationary monetary policy

Answer 10

• higher interest rates on both loans and savings
• tightening of credit supply (loans become harder to get)
• appreciation of the XR

Question 11

What is the real rate of return on savings

Answer 11

The money rate of interest minus the rate of inflation

Question 12

When do real interest rates become negative

Answer 12

When the nominal rate of interest is less than inflation

Question 13

What can price deflation lead to

Answer 13

An increase in real interest rates

Question 14

What are negative interest rates designed to do

Answer 14

• get commercial banks to lend
• bring about a reduction in real interest rates
• negative eaters are partly designed to cause an outflow of hot money thereby depreciating the XR
• main aim of negative rates is to lower the risks to output, profits, employment & wages from deflation

Question 15

Key evaluation point about negative policy interest rates

Answer 15

Negative interest rates are a sign that conventional monetary policy of low rates may have been stopped being effective in deflating debt-ridden economies

Question 16

Risks of negative interest rates

Answer 16

• can lower bank profitability by narrowing the interest rate margins between savings and loans rates
• banks may take excessive risks in in search of higher returns
• people may hoard cash
• pension/insurance companies may struggle to meet long term liabilities
• economy dependent on negative rates

Question 17

When do Keynesians support the key role for expansionary fiscal policy

Answer 17

When monetary policy is being ineffective

Question 18

Impact of price deflation leads to

Answer 18

• higher real level of private and public sector debt
• higher real interest rates on loans
• weaker consumer and business confidence

Question 19

How has monetary policy in many developed countries being less effective

Answer 19

• banks are risk averse
• persistently high budget deficits have promoted fiscal austerity in many countries including the U.K.
• liquidity trap