Financial Markets and Monetary Policy

Question 1

monetary policy

Answer 1

short term demand side policy implemented by the central bank that involves changes in the supply of money, interest rates, credit availability, exchange rates to influence an economy. it is used to control AD with the main objective of achieving price stability and stable inflation at rate of CPI 2%

Question 2

rate of interest

Answer 2

the price of money, % cost of borrowing, % reward for saving. key influence on components C I X of AD

Question 3

government bond

Answer 3

fixed term security loan to a government to fund its spending

Question 4

bank base rate

Answer 4

rate of interest high street banks pay to borrow money from the BofE

Question 5

money supply

Answer 5

amount of notes and coins circulating in an economy in a given time period

Question 6

quantitative easing

Answer 6

form of monetary policy where BofE creates new money electronically when BBR is close to zero

Question 7

credit availability

Answer 7

the ease at which high street banks lend money to consumers to buy property with a mortgage or buy consumer goods with credit cards, or to firms to invest in capital goods

Question 8

credit crunch

Answer 8

commercial retail banks are reluctant to lend money to consumers and or have put up the rate of interest charged on loans

Question 9

exchange rate

Answer 9

the price of 1 currency in terms of another and determines how much of a foreign currency you can get for £1

Question 10

appreciation of a currency

Answer 10

currency rises in value when operating in a floating exchange rate system

Question 11

demand pull inflation

Answer 11

the price level is pulled up by increases in AD, taking place when the economy is at or close to full capacity

Question 12

cost push inflation

Answer 12

the price level is pushed up by sustained increases in the cost of production which are independent of changes in AD

Question 13

liquidity trap

Answer 13

nominal rate of interest is close to zero and the central bank cannot cut BBR any further so MP becomes ineffective

Question 14

loose expansionary MP response

Answer 14

cut in BBR in a recession or slowdown phase to increase AD and bring back inflation to target by stimulating demand pull inflation pressures

Question 15

tight contractionary MP response

Answer 15

increase the BBR to decrease the rate of inflation back down to CPI 2% target rate in the boom or recovery phase by decreasing AD and therefore real GDP