Monetary Policy Flashcards
What is monetary policy?
Monetary policy refers to the actions taken by a central bank to control money supply and interest rates.
Name the two main types of monetary policy.
Expansionary monetary policy and contractionary monetary policy.
What is the goal of expansionary monetary policy?
To stimulate economic growth by increasing money supply and lowering interest rates.
When is contractionary monetary policy used?
It is used to reduce inflation by decreasing money supply and raising interest rates.
How does a central bank control inflation?
By increasing interest rates, reducing money supply, or using open market operations.
What is the role of open market operations (OMO)?
OMOs involve buying or selling government securities to regulate money supply.
How does a central bank influence interest rates?
Through monetary policy tools like OMOs, discount rates, and reserve requirements.
Define the discount rate.
The interest rate at which commercial banks borrow from the central bank.
What is the reserve requirement?
The minimum fraction of deposits that banks must hold as reserves.
What is the monetary transmission mechanism?
It describes how changes in monetary policy affect the economy, including output and inflation.
How do low interest rates affect borrowing and investment?
Low interest rates reduce borrowing costs, encouraging investment and consumption.
What is inflation targeting?
A monetary policy strategy where the central bank aims to maintain inflation within a target range.
What is the relationship between exchange rates and monetary policy?
Changes in monetary policy, such as interest rate adjustments, can influence exchange rates by affecting capital flows.
What is quantitative easing (QE)?
A non-traditional monetary policy where central banks purchase financial assets to inject liquidity into the economy.
How does monetary policy affect employment?
Expansionary policies can reduce unemployment by stimulating demand, while contractionary policies may increase it temporarily.
What are central bank foreign exchange reserves?
Assets held in foreign currencies to stabilize the domestic currency and manage exchange rate fluctuations.
What is a dual mandate in monetary policy?
A central bank’s goal to achieve both price stability and maximum employment.
How can monetary policy address a recession?
By lowering interest rates and increasing money supply to stimulate economic activity.
What are the risks of expansionary monetary policy?
It can lead to inflation, asset bubbles, or excessive debt accumulation.
How does contractionary monetary policy stabilize an overheated economy?
By raising interest rates, it reduces spending and slows down inflation.
What is the impact of monetary policy on savings?
Higher interest rates encourage savings, while lower rates incentivize spending and investment.
What is the Taylor Rule?
A guideline central banks use to set interest rates based on inflation and economic output gaps.
How does fiscal policy differ from monetary policy?
Fiscal policy involves government spending and taxation, while monetary policy focuses on money supply and interest rates.
What is a central bank’s role in managing a currency crisis?
It can intervene in forex markets, adjust interest rates, or use reserves to stabilize the currency.
How do inflation expectations influence monetary policy?
Central banks adjust policies to align inflation expectations with their targets, ensuring price stability.
What is the neutral interest rate?
The rate at which monetary policy neither stimulates nor restricts economic activity.
How does monetary policy impact exchange rates in open economies?
Lower interest rates can lead to currency depreciation, while higher rates can cause appreciation.
What is the effect of an independent central bank on monetary policy?
Independence allows for unbiased decisions focused on long-term economic stability.
Why is credibility important for a central bank?
Credibility ensures public trust in the bank’s ability to maintain price stability, influencing inflation expectations.
How does monetary policy interact with global markets?
It affects capital flows, trade balances, and exchange rate dynamics, influencing global economic stability.
