Demand side policies

Question 1

Monetary policy is

Answer 1

the manipulation by government of variables such as money supply and interest rates to achieve its macroeonomic objectives.

Question 2

Monetary policy instruments are

Answer 2

• interest rates

- quantitative easing

Question 3

Two monetary policy instruments the Bank Of England has used to influence the UK economy are

Answer 3

• Interest rates

- Quantitative easing

Question 4

The goverment uses interest rates and quantitative easing because

Answer 4

it helped us get back out of the recession caused by the financial crisis of 2008

Question 5

Interest rates,as a monetary policy instrument can impact AD in ways such as through

Answer 5

• Wealth effects
• Investment
• The exchange rate

Question 6

Effects of interest rates as monetary policy for investment?

Answer 6

Lower interest rates>more attractive investment bc more profitable>therefore higher investment>higher ag demand

Question 7

Effects of interest rates as monetary policy for the exchange rate?

Answer 7

fall in exchange rate>likely fall in domestic currency,foreigners can get more pounds for each unit of their currency

Question 8

Effects of interest rates as monetary policy for wealth effects?

Answer 8

falling interest>rise in housing demand>Price of houses go up>homeowners feel better off because their assets increased in value>More likely to spend bc CONSUMER CONFIDENCE

Question 9

Effects of interest rates as monetary policy for SAVING?

Answer 9

higher interest rate>more likely to save to get in on the extra money>can decrease aggregate demand at the present time
THE HIGHER THE INTEREST RATE, THE GREATER REWARD FOR DEFERRING SPENDING TO THE FUTURE AND REDUCING SPENDING NOW. CURRENT AGDEMAND DECREASE.

Question 10

what is quantitative easing

Answer 10

is an instrument of moneterary policy where central bank buys financial assets in exchange for money IOT increase borrowing and lending in an economy

Question 11

In regards to monetary policy, the base rate is

Answer 11

the rate of interest that the bank of england charges if a bank borrows money from it overnight.

Question 12

How does quantitative easing impact interest rates being lowered?

Answer 12

IT CAN LOWER INTEREST RATES ON BONDS ISSUED BY GOVERMENT AND FIRMS BC THE boe HAS DECREASED their demand for those bonds.
qe also can influence other intrest rates e.g allow commercial bansk to offer low interest to customers since BOE gives them so much money to lend out.

Question 13

How does quantitative easings impact on interest rates affect the exchange rate?

Answer 13

lower interest rate>exchange rate of a country falls.r
e.g if we do quantitative easing and our interest rates fall,international investors will swithc their money out of uk assets and use it elsewhere. that means we will hve fall in pound demand,and rise in supply of pound. means also our exports r mroe competitve but imports less competitve

Question 14

expansionary monetary policies are:eed

Answer 14

these will increase AD. USED WHEN BELOW 2% INFLATION TARGET

• increase inflation
• increase growth
• reduce unemployment

Question 15

contracionary monetary policies are

Answer 15

decreased ad.used when we are over our 2% limit

• increase interest rates>increases mp to save
• reduce our current account deficit/>ad fal>growth fal>income fal>less spending on import>narrow our current ac deficit

Question 16

problems with monetary policy

Answer 16

• tame lag
• liquidity trap> reducing interest rates more is useless bc people already have converted all to cash due to uncertainty.
• savers>rate of return on savings is lower>if inflation is higher than nominal interest rate then rate of return on savings would be lesser than the prices in the economy

Question 17

evaluation points for monetary policy

Answer 17

consumer confidence> job prospects etc
business confidence>need to be confident in their business prospects aka future profits to incentivise their investment borrowing. money. then only they will benefit from interest cuts
-bank willingness>if they r not willing to lend then interest rate cut is useless e.g if there is a banking crisis

Question 18

uses to contractionary fiscal policy

Answer 18

-reduce budget defecit