Monetary Policy

Question 1

Effects of a rise in bank rate

Answer 1

1) increased incentives for households to save
2) lower investment by business, profitability of investment projects is reduced
3) rise in the exchange rate

Question 2

Effects of interest rate on other objectives

Answer 2

1) higher unemployment due to lack of spending
2) limited growth of supply side of economy- lack of investment
3) reduced exports

Question 3

Quantitative Easing

Answer 3

increasing the money supply by gov buying bonds to increase liquidity within the economy and thus encourage more borrowing

Question 4

forward guidance

Answer 4

announcements made by the central bank as to the likely future direction of monetary policy

Question 5

Method of QE

Answer 5

1) Banks create new money electronically
2) money used to buy financial assets mainly purchase of government bonds
3) more demand leads to higher bond prices
4) fall in long term interest rates
5) increase in consumption and investment = stimulate AD