Monetary policy

Question 1

monetary policy

Answer 1

the use of money supply, interest rates and the exchange rate to control the economy

Question 2

interest rates

Answer 2

the reward to saving and cost to borrowing

Question 3

exchange rate

Answer 3

the price of one currency in terms of another

Question 4

main functions of a central bank

Answer 4

-monetary policy function
-financial stability & regulatory function
-policy operation functions
-debt management

Question 5

expansionary monetary policy

Answer 5

fall in nominal level of interest rates, measures to expand the supply of credit from the banking system, depreciation of the external value of the exchange rate

Question 6

contractionary/deflationary monetary policy

Answer 6

higher interest rates on both loans and savings, tightening of credit supply (ie loans become harder to get), appreciation of the exchange rate

Question 7

Monetary Policy committee

Answer 7

made of of 9 members who meet 8 times a year to set the base rate

Question 8

factors considered when setting the base rate

Answer 8

gdp growth, retail sales data, equity markets, house prices, consumer confidence, average earnings, unemployment, foreign exchange markets, international data

Question 9

impact of cutting interest rates

Answer 9

-cost of servicing loans/debt is reduced, boosting spending power
-animal spirits should increase
-effective disposable income rises due to lower mortgage costs
-business investment boosted
-housing markets effects
- cheaper currency will increase exports

Question 10

why can low interest rates be ineffective

Answer 10

-low animal spirits
-when savers suffer a fall in their real incomes
-when there is deflation causing rir to rise
-when fiscal policy working in opposite direction eg austerity
-small fall may have negligible impact
-zero lower bound

Question 11

forward guidance

Answer 11

introduced by Mark Carney in 2013. it signalled that the bank of england will leave their policy interest rates unchanged as long as the unemployment rate is above 7% and inflation is under control. aims to build confidence by signalling that IRs will stay low for some time

Question 12

negative interest rates are designed to

Answer 12

• get banks lending, they will pay the central bank interest for holding money
  -bring about a reduction in RIR which might in turn stimulate increased business investment
  -cause an outflow of hot money thereby depreciating the exchange rate

Question 13

Quantitative easing

Answer 13

an unconventional monetary policy tool used in downturns/recessions where the central bank electronically creates more money via buying financial assets such as government bonds to increase the money supply and encourage spending

Question 14

funding for lending

Answer 14

where the bank of England lets commercial banks borrow funds from it cheaply, so that banks can then pass this on in the form of cheap loans to firms