MONETARY POLICY

Question 1

WHAT DOES MONETARY POLICY INVOLVE

Answer 1

It involves making decisions about interest rates, exchange rates and the money supply

Question 2

WHO SETS THE MONETARY POLICY

Answer 2

The Bank of England set monetary policy in the UK

Question 3

CONTRACTIONARY MONETARY POLICY

Answer 3

Involves high interest rates, restrictions on the money supply and strong exchange rates at an attempt of reducing AD

Question 4

EXPANSIONARY MONETARY POLICY

Answer 4

Low interest rates, fewer restrictions of the money supply and weak exchange rates at an attempt to promote AD

Question 5

CAUSES OF A RISE IN INTEREST RATES

Answer 5

➸Less borrowing
➸Less consumer spending
➸Less investment by firms
➸Less confidence
➸More saving
➸A decrease in exports
➸A rise in imports

Question 6

THE LIQUIDITY TRAP

Answer 6

When people are being pessimistic about the future state of the economy, they may prefer to keep hold of the money that they already have and are unlikely going to borrow more. In this case it wont cause a ripple effect and monetary policy will become ineffective.