Monetary Policy Flashcards
Define monetary policy
Changes in the base rate of interest to influence the growth of AD, the money supply, output,, jobs + inflation
Define the transmission mechanism
How interest rates impact economic agents
Outline the effects of an increase in interest rates
- reduced consumption - reduced living standards {increase in sales of inferior rather than normal goods?}, less disposable income
- firms will receive fewer investment
- People will have to pay back a higher sum of money
- gov will have less money to spend {rev will go down in line with reduced consumption}
- people may become more incentivised so they can pay back debt faster
- lower income households may further depend on benefits
Define the MPC
Monetary policy committee that decide monthly on the BoE base rate
Outline the factors that the MPC consider
- changes in oil prices
- inflation + economic growth
- wages + salaries
- unemployment levels
- housing markets
- global markets
Define narrow money
Notes and coins in circulation
Define broad money
Narrow money + money held in banks and building societies
Define the demand for money
The amount of people who wish to hold cash as opposed to other assets
What is the basis of monetary policy?
There is a long run relationship between the amount of money + inflation
Define quantitative easing
Increasing the money supply
Outline the process of QE
Central bank creates money - so they can buy bonds from financial institutions - IR fall - borrowing increases - spending increases - economy is boosted
What does QE help with?
Stimulating the economy, promote maximum employment, reducing long term IR
Define funding for lending
A short term objective that provides an incentive for banks to lend more by reducing the banks cost of borrowing
Outline the influences on the demand for money
- consumer confidence
- IR
- inflationary expectations
Define the loanable funds theory
How much credit you can obtain in an economy
Define a liquidity trap
A situation where the central bank cannot lower nominal IR any lower
Outline the consequences of a liquidity trap
- people hoard cash instead of save it
- there is a fall in the velocity of circulation of money
Outline the evaluation points of monetary policy
- macro objective conflict
- stage of the economic cycle
- many homeowners are on fixed rate mortgages
- people in rented properties see no changes
