Monetary Policy

Question 1

Monetary Policy

Answer 1

manipulation of money supply and interest rates done by the central bank.

Question 2

Interest Rates

Answer 2

The cost of borrowing money.

Question 3

Nominal Interest Rate

Answer 3

The actual interest rate of a loan, regardless of inflation.

Question 4

Real Interest Rate

Answer 4

The interest rate of a loan adjusted to the inflation rate.

Question 5

Strengths of monetary policy

Answer 5

• Incremental, flexible, and easily reversible: Raised or lowered by small amounts
• Short time lags: No voting or bureaucracy. Response is almost immediate

Question 6

Weakenesses of monetary policy

Answer 6

• Limited scope for reducing interest rates, when they are close to zero
• Ineffective during recessions: low consumer and business confidence - decreased output + fired workers. Low chance of borrowing.