Lesson 25 - Monetary Policy + Demand Management Flashcards
Which 2 factors influence the value of money?
Rate of inflation
Exchange rate
Which 2 factors influence the availability of money?
Supply of money
Interest rate
What is monetary policy?
Involves changes in IR, supply of money + credit and exchange rates in order to influence economy
What are interest rates?
Reward for saving
Cost of borrowing
Expressed as % of money saved/borrowed
What are the types of interest?
Interest rates have n savings in bank accounts
Borrowing (Mortgage, credit cards, bonds)
What does the transmission mechanism consist of?
Change in market interest rates
Impact on demand
Effect on output, jobs + investment
Real GDP + price inflation
How does the transmission mechanism work?
Bank of England changes base rates (impacts borrowings + savings)
AD shits due to consumption, investment change
Corresponding multiplier occurs
R.GDP and prices change accordingly
How long do full impacts on r.gdp + inflation usually take to occur?
12-24 months
What are the types of monetary policy?
Expansionary
Deflationary
What does expansionary monetary policy consist of?
Fall in real + nominal IR
Measures to expand supply of credit
Exchange rates depreciate
What does deflationary monetary policy consist of?
Higher IR on loans + savings
Tightening of credit supply (Hard to get loans)
Appreciation of exchange rate
What is quantitative easing?
Central bank purchases existing govt bonds in order to inject money directly into financial system
What is quantitative easing regarded as?
Last resort to stimulate spending
IR too low to do so
What does the Bank of England use quantitative easing to do?
Increase supply of money in banking system
Encourage banks to lend at cheaper IR
(Especially to small + medium businesses)
Describe the cycle which acts as a limit of monetary policy
Banks reluctant to lend
Low confidence - low cons + inv
Asset prices bubble (Low IR)
Falling real income for savers
Personal debt holds back demand
Some IR (eg credit card) rise
