Monetary Policy Flashcards
What is monetary policy about?
The use of interest rates, the supply of money and credit, and exchange rates to influence the economy
What are monetary policies?
Demand-Side policies
Boost aggregate demand
What are the types of monetary policy?
contractionary and expansionary
What is contractionary policy?
Reducing AD using high interest rates, strong exchange rate and reduction of money supply
What is expansionary policy?
Increasing AD
Low interest rates
Increased spending
Weak exchange rate
Why can’t all objectives be satisfied?
Conflicting objectives
What is an interest rates?
The reward for saving and the cost of borrowing, expressed as a percentage of money saved or borrowed.
What are examples of central banks?
European Central Bank
Federal Reserve
Bank of England
Bank of Japan
People’s Bank of China
What do Central Banks do?
Issue notes and coins
Target low inflation
Support the government’s other objectives
Conduct Monetary policy
Ensure Stability of the Financial System
Lender of last resort to the government and commercial banks
What’s the purpose of inflation targeting?l
Reduce inflationary expectations
Fiat money only holds value because of belief
Allow the BOE to concentrate on overall inflation rather than focusing on a particular variable that partly contributes to inflation.
What does the monetary policy committee do?
A group of 9 economists, chaired by the governor of the BOE
Who set the Bank Rate
What is the bank rate?
Ser by the MPC
The rate of interest the BOE pays to commercial banks on their deposits held at the BOE, or the rate it charges to commercial banks for borrowing from the BOE
What does increased interest rate lead to?
Less borrowing
Less consumer spending
Less investment
Less confidence
More saving
Decrease in exports
Increase in imports
Increased currency value
What does a decreased interest rate lead to?
More borrowing
More consumer spending
More investment
More confidence
Less saving
Increase in exports
Decrease in imports
Decreased currency value
How do interest rates affect currency values?
Higher interest rates encourage people to buy the currency. This leads to the price of the currency rising.
Why is monetary policy flawed?
It has multiple year time lags
What is QE
Quantitative easing is a monetary policy tool used to stimulate economic activity
How does QE work?
BOE creates digital money
BOE buys government bonds or financial assets from insurance companies and pensions funds
These firms don’t keep as money has a low ROI, so they use the funds to make further purchases of other assets
This leads to increaded economic activity
How does the BoE maintain credibility?
Transparent process
Inflation Repirt
Diverse Background
Why isn’t the implementation of interest rates not 100% effective?
Time lags
Savers and borrowers
Fixed rate
Passing on by banks
Confidence
Conflicting objectives
What is the effect of interest rates on assets?
The price of bonds in inverse to long interest rate
House prices are also inverse
