Macroeconomic Policy Instruments

Question 1

Monetary policy transmission mechanism effects

Answer 1

-market rates eg. commercial banks
-house prices & mortgages
- confidence
-exchange rates

Question 2

How does a change in the bank rate effect AD

Answer 2

-market rates, house prices & consumer confidence lead to a change in domestic and net external demand
-change in AD leads to domestic inflationary pressure & effects inflation

Question 3

How does a change in the bank rate effect AS

Answer 3

• a change in exchange rate means input prices change leading to effects on inflation

Question 4

Draw a diagram demonstrating how a change in bank rate affects inflation

Answer 4

p5

Question 5

How does monetary policy work? (transmission mechanism)

Answer 5

They change the supply of money to increase or decrease the rate of interest

Question 6

Name 3 ways the Monetary Policy Committee change interest rates

Answer 6

1) Reserve requirements
2) Discount rate
3) Open Market Operations

Question 7

How does reserve requirements work

Answer 7

Banks have to reserve a % of deposits that they take. If this amount changes, there will be a higher or lower amount of money circulating, therefore changing the interest rate of commercial banks.

increase ir : increase reserve requirements (banks need more money and increase rates)
decrease ir : decrease reserve requirements (bank has more money and decreases rates)

Question 8

How does discount rate work

Answer 8

Change base rate for commercial banks at which loans are payed back to bank of enland.

increase ir : increase base rate (banks need more money and increase rates)
decrease ir : decrease base rate (bank has more money and decreases rates)

Question 9

How does open market operations work

Answer 9

Common in the US,
Gov bonds replace cash in commercial banks. Meaning commercial bans have less money supply vice versa.

increase ir : commercial banks buy more bonds (banks need more money and increase rates)
decrease ir : commercial banks sell bonds (bank has more money and decreases rates)

Question 10

Draw the interest rate monetary policy graph

Answer 10

P5

Question 11

contractionary monetary policy

Answer 11

reducing AD using high interest rates, restictions on the money supply and a strong exchange rate

Question 12

expansionary monetary policy

Answer 12

increasing AD using low interest rates, fewer restrictions on money supply, and weak exchange rate

Question 13

reflatonary fiscal policy

Answer 13

boosting AD through increasing gov spending or lowering taxes, budget deficit

Question 14

deflationary fiscal policy

Answer 14

reducing AD through reducing gov spending, and increasing taxes budget surplus.

Question 15

What is the balance of payments

Answer 15

records all flows of money into and out of a country

Question 16

current account 4 components

Answer 16

-trade in goods
-trade in services
-primary income
-secondary income (transfers)