monetary policy Flashcards
what type of policy is this
demand side
what does it control
money supply
what is its main policy tool
interest rates
what are interest rates
the cost of borrowing money and the return on savings.
what is a change in the base rate
When short term interest rates are changed
whats the base rate target in england
2%
what is expansionary fiscal policy
lowering interest rates to shift AD rightwards
what is contractionary fiscal policy
increasing interest rates to shift AD leftwards
what are the 5 monetary policy tools
Changing the interest rate
Inflation Targets- guides monetary policy decisions to keep inflation within a desirable range
Increasing/Decreasing the money supply – e.g increase or reduce availability of CREDIT.
QE – (printing money) – BOE buys risky assets of BANKS and gives them cash
Intervening in currency markets to manipulate exchange rates.
what happens when the interest rate is above the base target
interest rates rise as gov uses contractionary monetary policy to reduce AD
what happens when the interest rate is below the base target
interest rates fall as gov uses expansionary monetary policy to reduce AD
what is monetary policy
changes to the interest rates, money supply and the exchange rate by central banks in order to influence AD
what are effects of policies implemented due to expansionary monetary policy
increasing inflation
increase economic growth
reduce unemployment
why increased inflation
Lower interest rates encourage businesses to invest and consumers to spend more, leading to higher demand for goods and services, which can drive up prices (demand pull inflation).
why increased economic growth
making it cheaper for businesses and individuals to borrow money.
Businesses take out loans to expand operations, invest in new projects, and hire more workers.
could lead to better quality products increasing the demand
why reduce unemployment (think currency)
Lower interest rates may cause the national currency to depreciate.
A weaker currency makes exports cheaper and more competitive internationally, increasing demand for domestic goods and services.
Export-driven industries expand, creating more jobs.
what are effects of policies implemented due to contractionary monetary policy
reduce inflation
reduce excess debt and promote saving
reduce current account deficit
why reduced inflation (think government bonds)
The central bank sells government bonds (open market operations), pulling money out of circulation.
Banks have less money to lend, tightening credit and further reducing spending and investment.
With less money chasing goods and services, price increases slow down.
reduces demand pull inflation (but less effective in bringing down CP infl could be due to increase in world commodity prices like oil- eval point)
why reduce current account deficit
