Macro Economics Monetary and Supply Side Polices

Question 1

Monetary Policy

Answer 1

When the central bank manipulates the money supply and interest rates to stimulate or contract AD to promote Full employment, Economic Growth, Price stability

Question 2

Central Bank

Answer 2

The institution in most modern market economies that control the supply of money to a nations economy, they are separate from the government , they shift SM

Question 3

Expansionary monetary policy

Answer 3

When the central bank increases the SM to the right to decrease the interest rates and money becomes less scarce as people borrow more from banks.

Question 4

Expansionary monetary policy

Answer 4

When the central bank increases the SM to the right to decrease the interest rates and money becomes less scarce as people borrow more from banks.
It shifts AD to the right

Question 5

Contractionary monetary policy

Answer 5

When the central bank shifts SM to the left increasing the interest rates, so then more becomes more scarce and the cost of borrowing rises.
It shifts AD to the left

Question 6

Required Reserve Ratio

Answer 6

The amount of deposits banks must keep in their reserve. If it is lower, they can lend out more money at lower interest rates

Question 7

Discount Rate

Answer 7

The interest that the central bank can charge on commercial banks. Lower rates mean the supply of money increases and there is more money

Question 8

Government bonds

Answer 8

Held by every commercial bank in the world, which is used to give government loans. To increase liquidity and money supply they buy bonds off the banks and house holds

Question 9

Federal Funds rate

Answer 9

The amount of interest rates on commercial banks borrowing each other’s money form their excess reserve, so that they meet their required reserve. The reserves increase after selling bonds.

Question 10

Open Market Operations

Answer 10

The buying and selling of government bonds

Question 11

Reserve Ratio

Answer 11

Changing the Required Reserve Ratio

Question 12

What are the factors that Limit monetary policy

Answer 12

• The degree of inflation; if high inflation is expected then people will spend quickly
• Depth of recession: Even a decrease in interest rates won’t motivate anyone to invest as they are too deep in a recession

Question 13

Tax reforms

Answer 13

Lowering taxes on businesses, so they have more money to spend on investment
Income taxes being cut causes incentive to work harder for harder incomes

Question 14

Labour Market reforms

Answer 14

Brings down the cost of labour, leading growth in national output by:
Reducing the minimum wage
Reducing labour union powers
Reducing government spending on unemployment benefits

Question 15

Merit and Public Goods

Answer 15

Goods that are under provided by the free market, such as goods with social benefits which exceed the benefit of the consumer, non excludable