Monetary policy

Question 1

Exchange rates

Answer 1

Price of one currency in terms of another - in other words, the purchasing power of one currency against another

Question 2

Exchange rates notes

Answer 2

-Determined by supply and demand
-Can appreciate (get stronger) or depreciate (get weaker)

Question 3

Strong pound (appreciated)

Answer 3

-More purchasing power against other countries
-M cost less (will increase) and X cost more (will decrease)

Question 4

Weak pound (depreciated)

Answer 4

-Less purchasing power against other countries
-M costs more (will decrease) and X costs less (will increase)

Question 5

Policy objectives

Answer 5

-Economic growth - want it to increase but be sustainable
-Price stability - stable inflation, around 2%
-Low unemployment - under 3%
-Balanced balance of payments - particularly avoiding large deficit

Question 6

Instruments (The how)

Answer 6

Objective of MP - inflation
Main instruments to do this - manipulating interest rates
-Could also be changing/controlling the money supply or manipulation of exchange rate (depreciating the pound on purpose)

Question 7

Targets

Answer 7

Governments set targets and BoE (Bank of England) has to decide how to achieve it-they have the authority, more specifically the MPC (monetary policy committee)

Question 8

MPC as an instrument

Answer 8

MPC changes the bank rate (primary interest rate at which the BoE loans to commercial banks) which signals to commercial banks e.g. Barclays to change the interest rate as well as mortgage and savings rates