Monetary Policy

Question 1

define monetary policy

Answer 1

the use of interest rates, the money supply and or exchange rates to achieve macroeconomic objectives

Question 2

define expansionary policy

Answer 2

cutting interest rates, increasing the money supply and or reducing the exchanging rate to increase AD

Question 3

define money supply

Answer 3

notes and coins in circulation and in bank accounts

Question 4

reasons for interest

Answer 4

reward for risk, to account for inflation to pay for the cost of recording the loan

Question 5

explain the transaction mechanism

Answer 5

risk decreases, cost of borrowing and reward for saving decreases, borrowing increases, saving decreases causing consumption to increase and AD increases

Question 6

explain an example of an expansionary policy

Answer 6

rate of interest decreases, reward for saving hot money in the uk decreases, outflow of hot money increases, supply shifts right, fall in exchange rate, wpidec, increasing AD

Question 7

explain how reducing interest rates causes a decrease in cost of borrowing increases AD

Answer 7

reduce cost of borrowing, boost consumer spending and investment spending by firm reducing savings

Question 8

explain how reducing interest rates causes a fall in the exchange rate increases AD

Answer 8

fall in exchange rate, boosts overseas demand for UK exports making imports expensive, encourage Uk residents to switch to domestically produced goods boosting spending

Question 9

explain how reducing interest rates increases AD

Answer 9

lower interest rates, increases share prices rather than banks people want to invest spare cash to shares to get higher return people with shares feel wealthier and consume more increasing spending