Monetary Policy

Question 1

What is the monetary policy objective?

Answer 1

the target or goal that the Bank of England aims to hit

Question 2

What is the monetary policy instrument?

Answer 2

the tool or technique of control used to achieve the objective

Question 3

What is an inflation rate target?

Answer 3

the CPI inflation rate target set by the government for the Bank of Englanf to try to achieve

Question 4

What is the MPC?

Answer 4

monetary policy comitee, economists who meet once a month to set the Bank rate

Question 5

What is the bank rate?

Answer 5

the rate of interest thw Bank of England pays to their commercial banks on their deposits held at the bank of england

Question 6

What is contractionary monetary policy?

Answer 6

using higher interest rates to decrease aggregate demand and to shift the AD curve to the left

Question 7

What are the three main ways in which lower interest rates decreases demand?

Answer 7

• reduce household consumption
• reduce investment
• effect exports and imports

Question 8

How do higher interest rates cause lower houshold consumption?

Answer 8

• encourages saving, less income for consumption
• cost of houshold borrowing increases, increases cost of servicing a mortgage and credit card debt, borrowers have less money to spend on consumption, more of their income spent on interest
• asset prices fall, reduce personal wealth, reduce consumption

Question 9

How do higher interest rates reduce business investment?

Answer 9

• businesses cancel or postpone projects as they believe higher borrowing costs make buying capital goods unprofitable

Question 10

How do higher interest rates effect exports and imports?

Answer 10

• higher interest rate, increased demand for pound by attracting capital flows into the currency, makes exchange rate rise, UK exports less price competitive, imports more competitive, balance of payments worsens

Question 11

What is expansionary monetary policy?

Answer 11

uses lower interest rates to increase aggregate demand and to shift the AD curve to the right

Question 12

What is QE?

Answer 12

bank creates new money which is electronic with which the bank purchases assets such as government bonds, by purchasing bonds from banks the high street banks then have more money which increases AD

Question 13

What does QE result in?

Answer 13

fall in long term interest rates, AD shifts to the right

Question 14

What are some disadvantages of QE?

Answer 14

• causes a fall in value of pensions that will eventually lead to inflation