Chapter 18: monetary policy

Question 1

Monetary policy

Answer 1

Controlling the macroeconomy via changes in monetary variable such as the money supply or interest rates.

Question 2

Central bank

Answer 2

The financial institution of a country or group of countries typically responsible for issuing notes and coins and setting short-term interest rates.

Question 3

Interest rate

Answer 3

The cost of borrowing or the reward for saving.

Question 4

Real interest rate

Answer 4

Money rate of interest - rate of inflation

Question 5

Transmission mechanism of monetary policy

Answer 5

How changes in the base interest rate influence the components of AD.

Question 6

RPIX

Answer 6

A measure of the price level that excludes payments to service mortgage interest from the Retail Price Index measure. Used as the target measure for inflation by the government and MPC until the end of 2003.

Question 7

Repo rate

Answer 7

The interest rate that is set by the MPC of the Bank of England in order to influence inflation. short for ‘sale and repurchase rate’

Question 8

CPI (Consumer Price Index)

Answer 8

A measure of the price level similar to the HICP (Harmonised Index of Consumer Prices) used widely in the Eurozone. Used since 2004 as the target measure for inflation by the government and MPC.

Question 9

Money supply

Answer 9

The total amount of money in an economy.

Question 10

Exchange rate

Answer 10

The price at which one currency, e.g. the pound, exchanges for another, e.g. the US dollar.

Question 11

Narrow money

Answer 11

Notes, coins and balance for normal transactions.

Question 12

Broad money

Answer 12

Money that is held in banks and building societies but that is not immediately accessible.

Question 13

Hot money

Answer 13

Money that is liable to rapid transfer from one country to another.