Monetary Policy Flashcards
1
Q
Monetary Policy
A
- used to control the money flow in the economy
- Done with interest rates and QE
- Conducted by the Bank of England
- Manipulates Interest rates, money supply and the exchange rate
2
Q
Interest rates
A
- Bank controls the base rate
- high IR - reward for saving and cost of borrowing high - encourages more saving and less spending (used during high inflation)
- Low IR - reward for saving and cost of borrowing low- encourages spending and Investment (used during low inflation)
3
Q
Quantitative Easing
A
- has an inflationary effect
- used when inflation is low
- pumps money directly into the economy
4
Q
Process of quantitative easing
A
- bank bought asses (gov. bonds)
- used to buy bonds from investors
- increases cash flow
- encourages lending to Firms and Consumers as the cost of borrowing decreases.
- Increases I + C and growth
- Therefore Inflation
5
Q
Factors considered when setting the bank rate
A
- Unemployment Rate
- Savings rate
- Consumer Spending
- High commodity prices
- Exchange rate
6
Q
Unemployment Rate
A
If high, consumer spending may fall
- Drop interest rates
7
Q
Savings rate
A
if a lot of saving, less consumption
- Drop interest rates
8
Q
Consumer Spending
A
High could lead to inflationary pressures
- Increase interest rates
9
Q
High commodity prices
A
Cost push inflation (inflationary pressures)
- Increase interest rates
10
Q
Exchange rates
A
- A weak pound would cause average price level to increase
- UK exports cheap and Imports expensive
- Increases net imports
- Increase interest rates
11
Q
Changes in Exchange Rate affect of AD and macroeconomic policies
A
- Reduction in the exchange rate means UK current account deficit would improve
12
Q
Inflationary
A
- Inflationary (price of raw materials)
- Production costs increase - causes cost - push inflation
