monetary policy

Question 1

what is monetary policy and different types

Answer 1

-changes to interest rates, money supply and exchange rate by the central bank to influence AD
-expansionary (increase AD)
-contractionary (reduce AD)

Question 2

expansionary monetary policy vs contractionary objectives

Answer 2

-increase inflation
-increase growth
-reduce unemployment

-reduce inflation
-prevent excessive growth to house prices and borrowing
-reduce excess debt
-reduce current account deficit

Question 3

expansionary monetary policy transmission mechanism

Answer 3

AD (main aim)
-decrease credit and interest rates
-decrease saving, mortgage rates (variable and tracker rate), business loan rates (hurdle)
-weaker exchange rate (hot money outflows)

LRAS
increase investment (lower interest rates)
-increase labour quantity (higher incentive)

Question 4

hot money

Answer 4

-money that follows the currency with the highest interest rate

Question 5

evaluation expansionary monetary policy cons and evaluation

Answer 5

cons: demand pull inflation
current account deficit
liquidity trap-lose effectiveness when ir hit lower bound, consumers and businesses have converted into cash
negative impact on savings
time lags

evaluation: size of output gap
consumer confidence
business confidence
banks willing to loan
size of rate cut

Question 6

contractionary monetary policy pros and cons

Answer 6

pros: lower inflation (d-pull)
discourage household debt
more sustainable borrowing
encourage saving
more affordable housing

cons: lower growth
higher unemployment
impact on indebted
reduce investment (disincentive)