macro 23 monetary policy

Question 1

define monetary policy?

Answer 1

Changes in Interest rates, money supply and exchange rates to manipulate AD

Question 2

What are the roles of the central bank?

Answer 2

Control base rate.
Main goal of inflation.
Control money supply.
Banker to the govt and other banks.
lender of last resort.

Question 3

what is the Inflation target and why is using a target beneficial?

Answer 3

CPI 2%.

Flexibility to get some economic growth.
Pay increases.

Question 4

Why is it considered beneficial to have the interest rate set by an independent body (MPC)?

Answer 4

to avoid political bias.

Question 5

what does it means when it states that the MPC is forwards thinking?

Answer 5

They make decisions to the rate of interest now intending to control inflation is 2 years time

Question 6

what is the private debt to gdp ratio in the UK?

Answer 6

200%

Question 7

define liquidity trap?

Answer 7

A situation where interest rates cant fall further and monetary policy cant influence AD.

Question 8

What 2 reasons are falling prices dangerous to an economy?

Answer 8

1. No profit incentive (AD falling).
2. Deflationary spiral - consumers keep waiting for lower prices.

Question 9

define quantitative easing?

Answer 9

Unconventional monetary policy used by a central bank where tey purchase securities to lower interest rates and increase money supply.

Question 10

What are the 3 aims of Quantitative easing?

Answer 10

1. Prevent deflation.
2. Increase growth.
3. Increase confidence.

Question 11

What is the transmission mechanism that can be used to explain QE?

Answer 11

Central bank buys govt bonds. Demand for bonds increase. Price of bonds increase. Yield of bonds falls due to an inverse relationship. Investors sell their bonds as they less attractive, and move to corporate bonds. This leads to more consumption and AD increases.

Question 12

QE can end in 3 ways, what are they?

Answer 12

SUCCESSFUL: Money that is pumped into the economy stays in the economy.
UNSUCCESSFUL: Confidence doesn’t recover after many QE attempts.
DON’T REVERSE: Leads to inflation.

Question 13

What is the case FOR Quantitative easing?

Answer 13

Increases confidence. LEads to higher consumption and so increases AD.

Question 14

What is the case AGAINST Quantitative easing?
(INEQUALITY)

Answer 14

Some economists say that it causes inequality. They also purchase corporate assets to increase lending in the private sector. However, firms have been accused of “sitting on cash” instead of investing in the economy. Instead they invest in other assets that get them high returns, leading to more inequality.

Question 15

What is the case AGAINST Quantitative easing?
(HOUSING BUBBLE)

Answer 15

QE creates a housing bubble. This happens because as the BOE kickstarts the economy, confidence increases. This leads to more borrowing and more mortgages taken out, which leads to increased demand for housing- creating a bubble.
This exacerbates the UK’s private debt.

Question 16

What is the case AGAINST Quantitative easing?
(INFLATION)

Answer 16

QE could cause inflation. Monetarists believe that inflation is caused by increasing money supply, assuming V and Q are fixed. Price would then increase.

Question 17

Did QE work in the UK?

Answer 17

• The effects were slow because confidence in the economy was low.
• Made inequality worse.
• Supporters of QE thought it work because they think the recession would have lasted longer if it wasn’t used.