interest rates, qe and monetary policy

Question 1

Define Interest Rates.

Answer 1

Is the cost of borrowing and the reward for saving

Question 2

What are the benefits of Quantitative Easing?

Answer 2

• 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

Question 3

What happens to house prices as Interest rates Rise?

Answer 3

House prices fall because mortgages become less affordable which causes a negative wealth effect.

Question 4

How will a rise in interest rates affect those looking to Hire Purchase?

Answer 4

The monthly repayment instalments will becomes more expensive, which means that consumer may delay future major expenditure

Question 5

Who carriers out Fiscal Policy?

Answer 5

The government

Question 6

If Monetary Policy is Expansionary (cut in interest rates or increased amounts of QE) then what what happens to AD?

Answer 6

AD shifts to the Right

Question 7

What is the inflation target?

Answer 7

2% (1% either side)

Question 8

What is meant by the term Spare Capacity?

Answer 8

measures the extent to which an industry, or economy is operating below the maximum sustainable level of production

Question 9

Does the government decide the level of interest?

Answer 9

No

Question 10

Evaluative points for Monetary Policy.

Answer 10

• 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

Question 11

Why was quantitive easing needed during the financial crisis?

Answer 11

– Contracting real output
– price deflation

Question 12

Define Quantitative Easing.

Answer 12

Is the Central Bank increasing the money supply using electronically created funds to buy government bonds.

Question 13

How is net exports affected by interest rate changes?

Answer 13

Interest rates affect the cost of production and therefore productivity

Also interest rate changes affect the exchange rate which impacts export and import prices

Question 14

Define Liquidity Trap.

Answer 14

occurs when low/zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective.

Question 15

Do consumers/firms borrow more if interest rates are low?

Answer 15

Yes

Question 16

What are the effects of higher interest rates on mortgages?

Answer 16

1 - Higher mortgage interest payments 
2 - Reduces Consumption & Fall In house prices 
3 - Lower Economic Growth & Lower Inflation

Question 17

How does Quantitative Easing Work?

Answer 17

• 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

Question 18

What happens to the balance of payments as interest rates rise?

Answer 18

• 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)

Question 19

What is the effect of higher interest rates on money flows into the UK?

Answer 19

1 - Increased amount of ‘Hot Money Flows’ 
2 - Appreciation in the exchange Rate 
3 - Lower Inflation

Question 20

What will happen to the budget deficit (national debt) if the government adopts a tight fiscal policy?

Answer 20

Cause an improvement in the government budget deficit

Question 21

What is meant by the term Direct Tax?

Answer 21

Is a tax on incomes (eg. Income tax, corporation tax)

Question 22

Increasing interest rates is good for….
But bad for…..

Answer 22

• Good for controlling inflation 
- Bad for economic growth

Question 23

What is the affect of high interest rates on Consumers?

Answer 23

• 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.

Question 24

Who decides what the rate of interest will be?

Answer 24

Bank of England

Question 25

definition of monetary policy

Answer 25

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