interest rates, qe and monetary policy Flashcards
Define Interest Rates.
Is the cost of borrowing and the reward for saving
What are the benefits of Quantitative Easing?
- Creates Fiscal Expansion, not austerity (during a recession it promotes growth rather than trying to reduce the nationals debt) - Inflation has not been a macroeconomic problem since 2008
What happens to house prices as Interest rates Rise?
House prices fall because mortgages become less affordable which causes a negative wealth effect.
How will a rise in interest rates affect those looking to Hire Purchase?
The monthly repayment instalments will becomes more expensive, which means that consumer may delay future major expenditure
Who carriers out Fiscal Policy?
The government
If Monetary Policy is Expansionary (cut in interest rates or increased amounts of QE) then what what happens to AD?
AD shifts to the Right
What is the inflation target?
2% (1% either side)
What is meant by the term Spare Capacity?
measures the extent to which an industry, or economy is operating below the maximum sustainable level of production
Does the government decide the level of interest?
No
Evaluative points for Monetary Policy.
- Raises the cost of production and causes inflation - Takes 18 months to 2 years for interest rates to have their full impact (further delays because many mortgage holders have fixed rate policies, which delays the impact of their spending for some years) - Monetary Policy hits the whole economy big and small businesses. - Rising Interest Rates usually worsens income distribution
Why was quantitive easing needed during the financial crisis?
– Contracting real output – price deflation
Define Quantitative Easing.
Is the Central Bank increasing the money supply using electronically created funds to buy government bonds.
How is net exports affected by interest rate changes?
Interest rates affect the cost of production and therefore productivity
Also interest rate changes affect the exchange rate which impacts export and import prices
Define Liquidity Trap.
occurs when low/zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective.
Do consumers/firms borrow more if interest rates are low?
Yes
What are the effects of higher interest rates on mortgages?
1 - Higher mortgage interest payments 2 - Reduces Consumption & Fall In house prices 3 - Lower Economic Growth & Lower Inflation
How does Quantitative Easing Work?
- Central Bank creates new money electronically (by adding it to its balance sheet) - This Money is used to buy financial assets (government bonds) - More Demand leads to higher prices of assets (Rise in the price of bonds leads to a lower yield for GOVERNMENT bonds) - Can cause a fall in long term interest rates - Lower Interest rates and more cash in the banking system stimulates AD through a rise in consumption and investment
What happens to the balance of payments as interest rates rise?
- Worsens - Because Cost of production for firms increase so then they might reflect this cost increase onto the consumers in the form of prices, making UK exports less competitive globally - Appreciation of the pound causes the level of imports to increase (SPICED) (Strong Pound Imports Cheap Exports Dear)
What is the effect of higher interest rates on money flows into the UK?
1 - Increased amount of ‘Hot Money Flows’ 2 - Appreciation in the exchange Rate 3 - Lower Inflation
What will happen to the budget deficit (national debt) if the government adopts a tight fiscal policy?
Cause an improvement in the government budget deficit
What is meant by the term Direct Tax?
Is a tax on incomes (eg. Income tax, corporation tax)
Increasing interest rates is good for…. But bad for…..
- Good for controlling inflation - Bad for economic growth
What is the affect of high interest rates on Consumers?
- Consumers who borrow in order to finance their spending will be deterred from doing so - Savers will not spend their money as there is a greater opportunity cost in doing so.
Who decides what the rate of interest will be?
Bank of England
definition of monetary policy
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