Monetary Policy

Question 1

What’s monetary policy?

Answer 1

Action that a country’s central bank or government can take to influence how much money is in the economy and how much it costs to borrow.

Question 2

What is monetary policy used for?

Answer 2

To control inflation and support government aims for economic growth.

Question 3

How does monetary policy work?

Answer 3

It works by adjusting the supply of money in the nation and and central bank can ether speed up the economy or slow it down.

Question 4

How is monetary policy set up?

Answer 4

Either one of the three approaches.

1. The government sets the policy and the measures to achieve it
2. Government set the policy targets + central bank set interest rates
3. Central bank to set out the policy and the interest rates

Question 5

What’s the money market?

Answer 5

A market made up of supply and demand but the interest rate is the price of money.

Question 6

What’re the 3 reasons why individuals or businesses want to hold money?

Answer 6

• Transaction
• Precautionary
• Speculative

Question 7

What is the transaction motive?

Answer 7

Money is a medium of exchange so it’s necessary for transactions.

Question 8

What’s the precautionary motive?

Answer 8

In simple terms, savings for unexcepted expenses.

Question 9

What’s the speculative motive?

Answer 9

Money is also a means of storing wealth. This can be done with savings, company shares or assets.

Question 10

How is equilibrium in the money market brought about?

Answer 10

By changes in interest rates.

Question 11

What’re the two major sources of monetary growth?

Answer 11

A. Banks choosing to hold a lower liquidity ratio
B. Public-sector borrowing financed by borrowing from the banking sector

Question 12

Name 2 effects of and increase in the money supply

Answer 12

• Lower interest rates
• Higher AD
• Higher prices an output

Question 13

Name 2 techniques to control the money supply

Answer 13

• Bank liquidity ratio (minimum reserve ratio) to stop banks creating more credit
• Central bank lending to the banks - central bank cuts provisions to reduce liquid assets and cut banks’ credit

Question 14

What’re 2 methods of demand-side policy

Answer 14

• Political behaviour - governments boosting economy before elections
• The case of discretion - money supply should be altered to stop uncertainty

Question 15

What’re 2 methods of supply-side policy

Answer 15

Private sector led:
- Lower business tax to stimulate capital investment spending
- Lower income tax rates

Government led:
- Progressive taxes on wealthy to fund public and merit goods
- Selective import controls to allow domestic industries to expand.