monetary policy Flashcards
what does monetary policy involve
controlling the economy using either intrest rates, the money supply or exchange rates
what is quantitative easing
electronic (new) money is created by the bank of england which is used to buy assets such as bonds from commercial banks
commercial will the lend out this new money to customers, increasing the money supply
what does quantitative easing aim to do
help to grow the economy and avoid deflation from occuring, but there is a possibility that it may create inflation
how can quantitative easing be reversed
by the bank of england selling bonds to commercial banks or not buying future bonds from them
how do the central bank provide funding for lending to banks
giving cheap loans to banks, the money from which can the be loaned out to other customers at a higher rate
this may help the economy grow and avoid deflation, but it may create inflation
what is the structure of the UK economy from the industrial revolution until now
before the industrial revolution the UK economy was mostly in the primary sector (agricultural)
during the industrial revolution, the UK economy was mostly secondary (manufacturing) based
now, post-industria revolution the UK economy is mostly tertiary and quaternary based
in particular the financial sector has grown significantly, creating jobs and being the largest source of the UK’s exports
what are asset bubbles
when assets such as houses or shares rise in price rapidly and become over valued
this may be due to overconfidence. a rise in price attracts more buyers, searching for short-term profit, as they think it is a good investment. they think that they can out-wit the market and sell just before the market crashes
asset bubbles will usually burst in the long term, which may leave people with assets that are worth less than when they bought them, creating negative wealth. confidence may fall and banks may be reluctant to lend money
how is regulation used by the bank of england and other governing bodies
by setting capital and liquidity ratios which control how much a bank is allowed to lend out, compared to how much money they hold in reserve to ensure that banks do not run out of money
