Monetary Policy

Question 1

Expansionary monetary policy-saving chains of reasoning and evaluation (would be the reverse for contractionary monetary policy)

Answer 1

Decrease interest, more disposable income, increase MPC, increase consumption, multiplier effect, increase AD

Eval: For pensioners, solely reliant on savings, a fall in interest will reduce their consumption

Only works if confidence/animal spirits remain high, if not, spending and investment may not increase e.g in a recession

Question 2

Expansionary monetary policy-mortgages

Answer 2

Decreased interest, variable rate mortgages fall, cost of mortgages fall, increases demand for houses, increases house prices, positive wealth effect, so increase their consumption

Eval:most rent houses, so a rise in house prices will lead to a negative wealth effect so reduce consumption

Question 3

What % of people in London rent houses

Answer 3

76%-so positive wealth effect may not occur following expansionary monetary policy

Question 4

What policy did UK follow during COVID

Answer 4

Expansionary monetary

Question 5

What happened to interest rates and QE during COVID?

Answer 5

Interest 0.1%

QE of £450bn, total 895

Question 6

What negative impact has this expansionary policy resulted in?

Answer 6

High inflation of 9%

Question 7

What policy are the UK following now?

Answer 7

Contractionary

Question 8

What has happened to interest rates and QE now?

Answer 8

Interest 1%

Quantitative tightening-reduce money supply

Question 9

Monetary policy evaluations

Answer 9

Depends where along LRAS operating at, may just cause inflation
Banks may not pass on lower interest rates or continue to keep lending low
Confidence may still remain low
Depends on size of rate cut