Chapter 26: Monetary Policy

Question 1

Monetary policy

Answer 1

Use of monetary tools (Interest rate, money supply, and exchange rate) to influence total spending in an economy.

Can influence growth, employment, and inflation.

Question 2

Changing interest rate

Answer 2

If I.R increases/Contradictory:
- Borrowing becomess more costly
- Saving becomes more rewarding
- Monthly debt repayments increase
- Disposable income falls
- Investment becomes more expensive

If I.R decreases/Expansionary:
- Borrowing becomes cheaper
- Saving becomes less rewarding
- Monthly debt repayments lower
- Disposable income increases
- Investment becomes cheaper

Question 3

Changing the money supply

Answer 3

Money supply - all of the money in an ecnoomy at any given time

• Banks can print more moeny then use it to buy financial assests giving them liquid cash.
• Use the cash to make more loans to businesses and individuals.
• Increases spending especially investment

Expansionary

Question 4

Changing the exchange rate

Answer 4

Exchange rate - the price of one currency in terms of another

Deliberately lower exchange rate/Expansionary:
- Boost exports
- Reduce imports
- Increase total spending
- Boost growth
- Boost employment

Deliverately raise exchange rate/Contractionary:
- Reduce exports
- Increase imports
- Decrease total spending
- Reduce growth