Monetary Policies Flashcards
WHAT IS MONEY?
Essentially to be classed as money, an
item serves the following purposes:
➢ Medium of Exchange.
➢ Store of Value.
➢ Unit of Account.
FUNCTIONS OF BANKS.
❑ Storage of value for its clients.
❑ Acts as indirect investors on behalf
of clients.
❑ Provide credit facilities to
individuals and organisations.
❑ Align with monetary authorities to
enforce policies.
What is money demand?
❖ This represents the desire to hold money in its liquid form for over a period given key factors such as interest rates.
❖ People may decide to hold money for the following purpose:
1. Transactionary Motive (This is dependent on income level and frequency of income).
2. Precautionary Motive.
3. Speculative Motive: This depends on the
Interest rate.
What is money supply?
▪ This represents the total amount of
money in circulation at an economy
at a given period of time.
▪ It is generally inelastic to interest
rates.
What is the equilibrium interms of money?
➢ This is (unsurprisingly) the level of interest rate at which Money
Demand equals ‘fixed money supply
What happens when you raise money supply?
➢ Lowers interest rate.
➢ May boost the economy if it is producing below full employment
What does monetary policy do?
➢ Monetary policy is the use of interest rates and other instruments to influence policy targets, in particular inflation.
➢ The UK government sets a 2% target for
inflation.
➢ It is then the job of the Monetary Policy
Committee (MPC) of the Bank of England to decide on the appropriate interest rate to achieve this
what is interest rates
- Interest is the price of money
- More accurately it is the price for borrowing and lending money
What is the size of interest rates?
- The higher the rate of interest the more
attractive is saving and the less attractive is
borrowing. - The term i.e. length of borrowing and saving
and the risk involved affect the rate of
interest. - The rate of interest determines the demand
and supply of money which in turn affects
economic activity and inflation
