Monetary policy Flashcards
Who is responsible for carrying out monetary policy
Central banks are given targets by government which they should aim to achieve independently
What is the goal of monetary policy
To ensure inflation is at a stable rate for economic growth
what is the target rate of inflation in the UK
2%
Why are stable prices important to governments
Low inflation allows people to plan their savings, spending and investment. This helps the economy to grow
What is a result of inflation being too high
There is more uncertainty, which reduces business and consumer confidence. Resulting in low levels of AD
What are the tools that central banks can use to influence inflation
Changing bank rate (Interest rate)
Quantitative easing
Reserve requirement
Exchange rate
What is the most common method of controlling money supply
Changing interest rates to incentivise spending or saving
What is the bank rate
The interest rate that the Bank of England pay to banks that store money with them
What is quantitative easing
When the central bank purchases government bonds from financial institutions which pumps money into the economy
Why does changing the base rate affect the commercial interest rate
Banking is a competitive sector therefore banks want to give as much as possible without losing money. this means that increases or decreases in the base rate will affect the commercial interest rate
What are the 3 effects of increasing interest rates
The return on saving is greater – More people will save, decreasing AD
Borrowing is more expensive – I is decreased
The exchange rate of the pound is likely to increase – SPICED
What can stop monetary policy being effective at reducing inflation
If the inflation is caused by an increase in costs
What is a liquidity trap
When consumers and investors hoard cash instead of spending
