Chapter 9 Flashcards
Monetary policy
Monetary policy is the manipulation of the base interest rate and other monetary tools to influence
general levels of demand in the economy.
primary use of monetary policy
The primary use of monetary policy is to control inflation
to keep price stability and to encourage economic growth.
Quantitative Easing
QE is a specific form of monetary policy used recently in the UK and a few other economies (such as the US).
QE involves action by the government creating ‘cash’ in the economy, by purchasing a large number of assets
such as company and government bonds, swapping cash for the paper assets. This purchase, in turn, reduces
the cost of borrowing for many firms which, it was hoped, would lead to greater investment.
KEY principle of monetary policy
The key principal with monetary policy is that, by influencing price levels, other economic objectives will be
met. If prices are stable, then economic agents will be more confident which in turn should lead to greater
business investment and expansion.
How does monetary policy effect achieving economic growth
Expansion of output that comes from greater business investment should lead to growth in the economy
How does monetary policy effect maintaning full employment
This expansion should, in turn, mean that jobs are more secure, and employment may increase as businesses
look to take on workers to support this growth.
How does monetary policy effect having a balanced current account the balance of payments
If UK prices are stable in comparison to other economies, UK products should become more attractive to
foreign purchasers whilst UK consumers will see an increase the price of imports. This should help keep the
current account on the balance of payments balanced.
How does monetary policy effect achieving greater equality
In theory, if an economy grows and more people are employed, there should be a fall in the difference
between the lowest and highest paid workers. Monetary policy should, therefore, reduce inequality
Some economists believe QE has not supported greater equality. What do they argue what really happens
They argue that QE only really benefited big businesses and those people that regularly purchase bonds – often those people with
relatively high incomes anyway
Why may a change in interest rates have less impact on demand
Also, many other factors affect the price of goods (such as raw material costs, transportation costs and
exchange rates) which may mean that a change in interest rates has less impact on demand
