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ECONOMICS - YEAR 1 > MONETARY POLICIES > Flashcards

MONETARY POLICIES Flashcards

1
Q

WHAT IS A MONETARY POLICY?

A

A DEMAND SIDE POLICY THAT USES IR AND THE MONEY SUPPLY IN ORDER TO MANAGE AD.

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2
Q

WHAT IS THE GOVT TARGET FOR MONETARY POLICIES?

A

TO KEEP CPI INFLATION AT AROUND 2%

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3
Q

WHAT IS A CENTRAL BANK?

A

INSTITUTION WHICH IS USUALLY IN CHARGE OF ISSUING NOTES AND COINS WHICH WILL HAVE A LARGE IMPACT ON MONEY SUPPLY.

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4
Q

WHAT R THE RILES OF A CENTRAL BANK?

A
  1. IMPLEMENTATION OF MONETARY POLICY
  2. BANKER TO THE GOVT
  3. BANKER TO RETAIL BANKS
  4. LENDER OF LAST RESORT
  5. REGULATION OF THE BANKING INDUSTRY
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5
Q

WHAT IS THE EXPLANATION FOR IMPLEMENTATION OF MONETARY POLICIES?

A

USE IR, QUANTITATIVE EASING AND FORWARD GUIDANCE TO ENSURE TARGET OF 2% CPI INFLATION RATE IS KEPT.

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6
Q

WHAT IS THE EXPLANATION FOR BANKER TO THE GOVT?

A

CENTRAL BAMKS WILL LOOK AFTER THE GOVT DEPOSITS, PAY ITS BILLS AND MAKE SHORT TERM LOANS TO IT.

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7
Q

WHAT IS THE EXPLANATION FOR BANKER TO RETAIL BANKS?

A

BY LAW, RETAIL BANKS MUST HAVE AN ACCOUNT WITH THE BoE AND THEY CAN DEPOSIT FUNDS WITH THE CENTRAL BANK TO EARN INTEREST AND CAN ALSO BORROW FROM THE CENTRAL BANK

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8
Q

WHAT IS THE EXPLANATION FOR LENDER OF LAST RESORT?

A

THEY CAN MAKE EMERGENCY LOANS TO STOP RETAIL BANKS GOING BANKRUPT.

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9
Q

WHAT IS THE EXPLANATION FOR REGULATION OF THE BANKING INDUSTRY?

A

CENTRAL BANK IS RESPONSIBLE FOR BOTH MONETARY(PRICE) AND FINANCIAL (LIQUIDITY) STABILITY.

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10
Q

WHICH GROUPS
WOULD LIKE TO SEE IR RAISED?

A
  1. PENSIONERS
  2. FOREIGN SAVERS
  3. IMPORTERS( AS £ STRENGTHENS)
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11
Q

WHICH GROUPS WOULD LIKE TO SEE IR LOWERED?

A
  1. TRADE UNIONS
  2. HOMEOWNERS WITH MORTGAGES
  3. SMALL BUSINESSES LOOKING TO EXPAND
  4. EXPORTERS( AS £ WEAKENS)
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12
Q

WHAT IS THE TRANSMISSION MECHANISM?

A

PROCESS BY WHICH A CHANGE IN THE BoE’s BASE RATE AFFECTS INFLATION.

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13
Q

WHAT IS THE PROCESS OF THE TRANSMISSION MECHANISM?

A
  1. MARKET RATES, ASSET PRICES, EXPECTATIONS, EXCHANGE RATE
  2. DOMESTIC AND NET EXTERNAL DEMAND
  3. TOTAL DEMAND
  4. IMPORT PRICES
  5. INFLATION
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14
Q

WHAT IS THE EXPLANATION FOR MARKET RATES?

A

IF THE OFFICIAL BoE RATE INCREASES, HIGH STREET BANKS SHOULD FOLLOW SUIT AND INCREASE MARKET IR AS IT’S MORE EXPENSIVE FOR THEM TO BORROW.
IF IR INCREASES, PEOPLE R MORE LIKELY TO SAVE AND BUSINESSES R LESS LIKELY TO BORROW SO C+I FALLS

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15
Q

WHAT IS THE EXPLANATION FOR ASSET PRICES?

A

IF IR INCREASES, THIS MAKES SAVING MORE ATTRACTIVE SO INVESTORS R LIKELY TO INCREASE SAVING RATHER THAN BUY ASSETS E.G PROPERTY.
IF DEMAND FOR ASSETS FALL, THEN ASSET PRICES DECREASE WHICH CREATES A NEGATIVE WEALTH EFFECT SO C+I FALLS.

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16
Q

WHAT IS THE EXPLANATION FOR EXPECTATIONS?

A

IF IR INCREASES, IT IS A SIGN THAT THE BoE IS FEELING THAT THE ECONOMY MAY GO OVER THE INFLATION TARGET LEADING TO HIGHER PRICES.
THIS SHOULD MAKE BUSINESS AND CONSUMER CONFIDENCE FALL SO C+I FALLS.

17
Q

WHAT IS THE EXPLANATION FOR EXCHANGE RATES?

A

IF IR INCREASES(HOT MONEY), INVESTORS R ENCOURAGED TO PUT THEIR MONEY IN UK BANKS WHICH INREASES IMPORTS AND REDUCES EXPORTS.

18
Q

WHAT IS DOMESTIC DEMAND?

A

CONSUMPTION+ INVESTMENT+ GOVT SPENDING

19
Q

WHAT HAPPENS TO DOMESTIC DEMAND AS A RESULT OF THE TRANSMISSION MECHANISM?

A

DOMESTIC DEMAND FALLS AS C+I FALLS.

20
Q

WHAT IS NET EXTERNAL DEMAND?

A

EXPORTS - IMPORTS

21
Q

WHAT HAPPENS TO NET EXTERNAL DEMAND AS A RESULT OF THE TRANSMISSION MECHANISM?

A

HOT MONEY CAUSES NET EXTERNAL DEMAND TO FALL AS IMPORTS INCREASE AND EXPORTS FALL.

22
Q

WHAT HAPPENS TO IMPORT PRICES AS A RESULT OF THE TRANSMISSION MECHANISM?

A

ER INCREASES SO IMPORT PRICES R CHEAPER MEANING LOWER COSTS SHIFTING SRAS OUTWARDS CAUSING LOWER PRICES MEANING REDUCED INFLATION.

23
Q

WHAT R EXPANSIONARY MONETARY POLICIES?

A

CUTTING IR AND INCREASING THE MONEY SUPPLY.

24
Q

WHAT R EXPANSIONARY MONETARY POLICIES?

A

RAISING IR ASND CUTTING MONEY SUPPLY.

25
Q

WHAT R THE ADVANTAGES OF LOW IR?

A
  1. ECONOMIC GROWTH IF THERE IS SPARE CAPACITY
  2. REDUCED UNEMPLOYMENT
  3. REDUCED INEQUALITY
  4. INCREASED WEALTH EFFECT ( HIGHER ASSET PRICES)
  5. MULTIPLIER EFFECT
26
Q

WHAT R THE DISADVANTAGES OF LOW IR?

A

INCREASED INFLATION AT FULL EMPLOYMENT
2. INCREASE IN NEGATIVE EXTERNALITIES
3. TIME LAG OF 18-24 MONTHS
4. BLUNT POLICY(AFFECTS WHOLE ECONOMY)
5. LIQUIDITY TRAP( IF THERE IS DEFLATION, IR CAN’T NORMALLY BE CUT BELOW 0%)

27
Q

IN WHICH COUNTRIES R THERE NEGATIVE INTEREST RATES?

A

SWEDEN AND DENMARK HAVE BASE RATES OF -0.25% FOR DEPOSITS.

28
Q

WHAT DO NEGATIVE INTEREST RATES MEAN?

A

HIGH STREET BANKS R OVERCHARGED FOR PUTTING THEIR MONEY IN THE CENTRAL BANK AND THIS IS MEANT TO DISCOURAGE SAVINGS BY HIGH STREET BANKS AND PROMOTE LENDING.

29
Q

WHAT IS QUANTITATIVE EASING?

A

AIMS TO ENCOURAGE HIGH STREET BANKS TO LEND TO CONSUMERS AND BUSINESSES RATHER THAN BUYING LOTS OF GOVT BONDS - DOES THIS BY ATTEMPTING TO MAKE GOVT BONDS LESS VALUABLE.

30
Q

WHAT IS THE 1ST STAFE OF QUANTITATIVE EASING?

A

BoE CREDITS ITSELF WITH MONEY WHICH THEY USE TO BUY GOVT BONDS. INCREASED DEMAND FOR BONDS INREASES THEIR PRICE MEANING YIELD OF BONDS FALL SO IMVESTMENT IN OTHER ASSETS IS MORE EFFECTIVE. HIGH STREET BANKS THEREFORE SELLS BONDS TO BoE SO THEY HAVE MORE MONEY.

31
Q

WHAT IS THE 2ND STAGE OF QUANTITATIVE EASING?

A

HIGH STREET BANKS HAVE MORE MONEY FROM SELLING GOVT BONDS TO THE BoE SO SHOULD LEND MORE. BOND PRICES INCREASE SO WEALTH EFFECT OCCURS FOR BOND OWNERS. AS BOND PRICES INCREASE, YIELD OF BONDS FALLS SO BANKS R INCENTIVISED TO INVEST THEIR MONEY INTO OTHER METHODS I.E MORTGAGES.

32
Q

WHAT IS THE 3RD STAGE OF QUANTITITATIVE EASING?

A

INCREASED BORROWING AND LENDING INCREASES C+I CAUSING AD TO RISE AND HENCE INFLAITON AND GROWTH.

33
Q

WHAT R THE ADVANTAGES OF QUANTITATIVE EASING?

A
  1. CAN BE USEDE WHEN IR DOESN’T WORK DUE TO A LIQUIDITY TRAP
  2. CAN HELP AVOID THE DANGERS OF DEFLATION
  3. CAN BOOST EXPORTS AS IT LEADS TO A DEPRECIATION OF THE ER.
34
Q
A

ECONOMICS - YEAR 1 (9 decks)

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