Monetary Policy

Question 1

Monetary policy

Answer 1

Use of interest rates and the money supply to control aggregate demand in the economy

Question 2

Money supply

Answer 2

Amount of money circulating in the economy

Question 3

Base rate

Answer 3

Rate of interest set by the gov for lending to other banks

Question 4

Reasons for different interest rates

Answer 4

• Different banks charge different rates as they compete with each other
• Rates are higher if money is borrowed without security
• The amount paid to borrowers is higher than the amount given to savers

Question 5

Impact of interest rate changes on macro objectives

Answer 5

Inflation - reduce by slowing down speed at which the money supply is growing, by raising the rate of interest
Unemployment - lower interest rates used to reduce unemployment
Economic growth - may help smooth out small variations in the economic cycle

Question 6

Quantitive easing

Answer 6

Buying of financial assets, such as government bonds from commercial banks, which results in a flow of money from the central bank to commercial banks