Monetary Policy Flashcards
What is monetary policy
Monetary policy involves making decisions about interest rates, money supply and exchange rate
Who controls monetary policy in UK
Bank of England more specifically MPC (monetary policy Committee)
What is expansionary monetary policy
When AD grows, interest rates fall, money supply rise and exchange rate falls, government spending rises, unemployment falls
What is contractionary monetary policy
When AD falls as Interest rates rise, money supply falls, exchange rate rises, government spending falls, unemployment rises
How do high interest rates affect the economy
AD will fall as consumption, investment (Borrowing more expensive)
What is money supply
money supply measures the total amount of money in the economy at a particular time.
How does money supply factor inflation
Rapid growth in the money supply can cause inflation, and a rapid fall in money supply can cause a recession
Consumer prices index (CPI)
Measures the average cost of living
Deflation
Deflation is a rise in the real value of money over time but makes the general price level fall.
What government objectives are archived when interest rates are high
low inflation, price stability, increased GDP and more distribution of wealth.
What government objectives are achieved when interest rates are low
sustainable growth, unemployment falling and exports rising.
balance of payments definition
The difference between all the money entering and exiting the country in a defined period
What is budget deficit
A budget deficit occurs when government spending is greater than tax revenues.
What can reduce the deficit
tax increases or cuts in government spending or a period of GDP growth which brings about a rise in direct and indirect tax revenues.
What are the different accounts in the balance of payments
Current account (exports and imports trade)
Financial account (investments)
Capital account (funds in buying assets such as land)
