Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economics A-level > Monetary Policy > Flashcards

Monetary Policy Flashcards

1
Q

Define monetary Policy?

A

involves changes in interest rates, the supply of money and credit and exchange rates to influence the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is expansionary monetary policy?

A
  • AD rises
  • fall in nominal and real interest rates
  • measures to expand supply of credit
  • depreciation of exchange rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Breifly explain deflationary monetary policy?

A
  • lower AD
  • higher interest rates on lonas and savings
  • tightening of credit supply
  • appreciation of the exchange rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

TRANSMISSION MECHANISM

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the transmission mechanism of moneatry policy?

A

ways in which changes in interest rates influence aggregate demand, output and prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

GIve three logical chain of reasoning for rising of interest rates?

A
  • more expensive to borrow –> lower incentive
  • higher reward for saving –> greater incentive to save
  • rates rise on variable rate mortgages –> less discretionary income

all lead to fall in consumer spending, falling AD and fall in inflationary pressure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

WHat is the MPC

A

monetary policy committee

- sets interest rates monthly

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

WHat is the FPC?

A

financial policiy commitee

- safeguarding financial stability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are interest rates?

A

reward for saving and the cost for borrowing expressed as a percentage of the money saved or borrowed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Name the six types of interest rates in modern economy ?

A
  • bank loans
  • mortgages
  • credit card rates
  • payday loans
  • corporate loans
  • government bonds
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What does the bank of england set policy interest rates consistent with?

A

the need to meet an inflation target of consumer price inflation of 2%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Give some examples of what interest rates are set on?

A
  • GDP growth and spare capacity
  • bank lending
  • equity markets
  • consumer and business confidence
  • unemployment and employment data
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is a reduction in interest rates an example of?

A

expansionary monetary policy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What will lower interest rates do in economy?

A
  • cost of servicing loans/ debt is lower (boosts spending power)
  • higher consumer confidence
  • discretionary income rises
  • higher business investment
  • housing market is effected
  • cheaper currency increasing exports
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Impact of lower interest rates on demand side of economy?

A
  • reduces savings ratio and makes borrowing more attractive so consumption rises
  • increases real national output
  • creates employment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Impact of lower interest rates on supply side?

A
  • can stimulate businesses investment into capital process to improve their productivity and efficiency
  • investment componant of AD, so shifts outwards
  • productive capacity increases, higher growth and employment
17
Q

What is the downside of lower interest rates/

A
  • banks less willing to lend
  • low consumer confidence
  • huge levels of debt
  • ## falling or slowing rise asset process
18
Q

Give a logical chain of reasoning for higher interest rates?

A

MPC raises interest rates –> signals tighter MP –> market interest rates increase –> cost of borrowing rises –> main effect will be through mortgages –> slowdown in housing market –> contraction in retail credit –> currency appreciation –> makes Uk exports more expensive in overseas market

19
Q

What will investers do if the exchange rate increases and what is the impact?

A
  • move money to the Uk in order to get the best return –> HOT MONEY
  • increse demand for UK pound increases the exchange rate
  • exports less attractive, imports more
  • worsens balance of payments on current account
20
Q

When does a liquidity trap occurs?

A
  • low interest rates and high amount of cash balances in the economy fail to stimulate aggregate demand
21
Q

What are some reasons for a liquidity trap/

A
  • risk adverse commercial banks
  • low confidence in private sector businesses and consumers
  • low interest elasticity of demand
22
Q

What are the three main ways that interest rates decrease demand?

A
  • reduce household spending
  • reduce business investment
  • changes in interest rates affect exports and imports via exchange rate
23
Q

Evaluation points for monetary policy?

A
  • time lags in the economy
  • not an exact science, humans are unpredictable
  • doesnt work in isolation

Economics A-level (35 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions