Monetary Policy 2

Question 1

What do changes in interest rates affect

Answer 1

• housing market and house prices
• effective disposable incomes of mortgage payers
• disposable income of savers
• consumer demand for credit
• business capital investment
• consumer and business confidence
• interest rates and the XR

Question 2

How do changes in interest rates affect the housing market and house prices

Answer 2

High interest rates increase the cost of mortgages and reduce the demand for housing

Question 3

How do changes in interest rates affect the effective disposable incomes of mortgage payers

Answer 3

If interest rates increase, the income of homeowners who have variable-rate mortgages will fall - leading to a decline in their effective purchasing power

Question 4

How do changes in interest rates affect the disposable income of savers

Answer 4

Rise in interest rates = increases the disposable income of people who have paid off their mortgage and who have positive net savings in bank and building society accounts

Question 5

How do changes in interest rates affect the consumer demand for credit

Answer 5

Higher interest rates = increases the cost of paying the debt on credit cards and should lead to a deceleration in retail sales and spending on consumer durables

Question 6

How do changes in interest rates affect on business capital investment

Answer 6

When businesses and consumers are worried about the recession, an interest rate can boost confidence because it reassures the public that the bank is alert to the dangers of a slump

Question 7

How do changes in interest rates affect the interest rate and the XR

Answer 7

Higher interest rates can lead to an appreciation of the XR

Question 8

What is an expansionary monetary policy

Answer 8

A reduction in interest rates and/or an increase in the supply of money and credit in an economy

Question 9

What is a contractionary monetary policy

Answer 9

An increase in interest rates and/or attempts to control or reduce the supply of money and credit

Question 10

Why is there asymmetry in monetary policy

Answer 10

Some industries are more affected by interest rate changes than others.
Elastic PED = most affected

Question 11

Examples of interest-sensitive industries

Answer 11

Housing market, exporters of manufactured goods etc.