Chapter 27 Monetary Policy

Question 1

Define monetary policy

Answer 1

The use of monetary tools to influence total spending in an economy

Question 2

What are the commonly used monetary tools (3)

Answer 2

The interest rate

money supply

exchange rate

Question 3

Which institution carries out monetary policies

Answer 3

Central banks

Question 4

If the interest rate goes up what will happen to the components of aggregate demand? (2)

Answer 4

Consumer spending falls - Saving becomes more rewarding

Investment spending falls - taking in loans becomes more expensive

Question 5

Higher interest rate + lower govt spending is an example of ______ _____ _______

Answer 5

Contractionary monetary policy
(using interest rate to reduce total spending in an economy)

Question 6

How does increasing the money supply affect aggregate demand? (5)

Answer 6

Banks print money —> Use this money to buy financial assets (bonds and shares) from banks —–> commercial banks have liquid cash ——> Make more loans to businesses and individuals —–> Increases consumer and investment spending

Question 7

Define exchange rate

Answer 7

price of one currency in terms of another

Question 8

Changing the exchange rate affects which component of the GDP

Answer 8

X -M

exports - Imports

Question 9

Why might a central bank deliberately lower their exchange rate (2)

Answer 9

In order to boost exports and reduce imports (makes currency internationally competitive)

Increases total spending in an economy and help boost growth and employment

Question 10

Why might a central bank deliberately increase their exchange rate (2)

Answer 10

reduce exports and increase imports

reduces total spending in an economy and reduces inflation