Monetary

Question 0

What is real interest rate?

Answer 0

The value of interest minus inflation.

Question 1

What does it involve?

Answer 1

• money supply
• interest rates
• managed by MPC of central bank

Question 2

What is the def of interest rate?

Answer 2

The cost of borrowing or the reward for saving.

Question 3

What is the transmission mechanism of monetary policy?

Answer 3

How changes in the base interest rate influence the components of AD.
E.g high= less investment

Question 4

What are the 6 possible impact changes in interest rate has on AD?

Answer 4

1. Housing market= increase mortgages so less buying
2. Disposable income for mortgage payers= falls so less purchasing power
3. Consumer demand for credit= less credit cards so less consumption
4. Consumer/business confidence= whether or not expect a recession
5. Business investment= higher rates, less likely to invest
6. Exchange rate= higher interest rates, stronger pound

Question 5

What is the theory of quantitative easing? (6)

Answer 5

1. Central bank creates money
2. Buys bonds from financial institutions
3. Reduces interest rates
4. Business/consumers borrow more
5. ^spend more + create jobs
6. Boosting the economy

Question 6

What are the effects of quantitative easing?

Answer 6

• consumers more income
• prices increase as higher demand for scarce products (rationed out)
• banks richer, more likely to lend

Question 7

Why may monetary policies not increase AD and growth?

Answer 7

1. Size= bigger change, more effective
2. Other factors of AD
3. Output gap
   •negative= interest rates more effective
   •positive= inflation
4. Low confidence

Question 8

What is “hot money”?

Answer 8

When money is passed around countries as savers try to invest in higher interest rate countries.

Question 9

What is the def of exchange rate?

Answer 9

The price at which one currency exchanges for another.
WPIDEC
SPICED

Question 10

What are 3 advantages of having a strong pound?

Answer 10

1. Cheaper imports for consumers= boots real living standard as more purchasing power in other countries
2. Lower inflation= domestic suppliers have more international competition so lower prices
3. Lower production costs= cheaper to import raw materials

Question 11

What are 3 disadvantages of a strong pound?

Answer 11

1. Increase in trade deficit
2. Slower economic growth= Xs fall cause a decease in AD, reducing short term rate economic growth
3. Business confidence and capital investment= reduced demand in X markets tend to discourage investment