Monetary Policy

Question 1

What is monetary policy

Answer 1

When the central bank manipulates the base interest rate or money supply in order to influence aggregate demand

Question 2

If inflation is below its target

Answer 2

Bank of england will decrease the base interest rate which is the expansionary monetary policy as a decrease in interest rates expanded the economy

Question 3

If inflation is above its target

Answer 3

The BoE will increase interest rates, also known as contractionary monetary policy leading to a contraction in the economy

Question 4

What is quantitative easing

Answer 4

BOE electronically creates new money to buy gov bonds from high street banks.
This increases money supply, banks are more liquid so have more capital to lend to consumers to increase consumption and investment
Also led to depreciation of £ because of an Increase supply of £

2009-2012
Created £375 billion

Used after there was a liquidity trap in 2009 as IR =0.5

Question 5

What is expansionary monetary policy

Answer 5

When BoE decreases IR and increases money supply

Question 6

What is contractionary monetary policy

Answer 6

When the BoE increases interest rates and decrease money supply