Monetary policy

Question 1

Monetary policy

Answer 1

actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates

Question 2

2 functions of money

Answer 2

Medium of exchange

Store of exchange

Question 3

4 factors affecting MPC to maintain

Answer 3

Low oil price/inflation
Low confidence/business confidence
Broad supply of money
Output gap

Question 4

4 reasons for weak effect of low IR

Answer 4

Unwillingness of banks to lend (build buffer stock)
Low confidence
Huge debts
Low inflation/deflation of asset prices

Question 5

3 characteristics of money supply

Answer 5

Demand for money is downward sloping so higher IR increases saving
Money supply is inelastic vertical line, BoE can control money supply independent of its price
Equilibrium rate is where money demand=money supply

Question 6

Why did recession economies fail to stim AD with low IR?

Answer 6

‘Keynesian liquidity trap’ where there was low interest elasticity of money demand encouraged a less than proportional real money demand rise

Question 7

4 ways to control money supply

Answer 7

Monetary base control
Open market operations
Interest rate manipulation
Quantitative easing

Question 8

Monetary base control

Answer 8

Imposing reserve asset ratios or direct controls on lending quantitatively and qualitatively (2008)

Question 9

Open market operations

Answer 9

Issuing government bonds passes money to banks from non-financial sector, money lodged in BoE not counted in money supply

Question 10

6 things interest manipulation can affect

Answer 10

Mortgage owner disposable income
Real incomes of net savings
Demand for housing + prices
Confidence
Currency value

Question 11

Quantitative easing aim

Answer 11

Increase money supply with purchases of bonds to end credit freeze and stimulate business loans

Question 12

2 successes of QE

Answer 12

Prevented deep recession by providing 2% additional growth

Created inflation to prevent negative rate

Question 13

3 failures of QE

Answer 13

SEen diminishing returns as £375bn injection produced £25bn of additional spending
Furthered inequality as richest 5% of households up to £128,000 better off (Inequality means less money with households with greater propensity to spend worsening AD)
Not invested in productivity instead used in speculative bubbles which could still burst

Question 14

2 new monetary policy changes

Answer 14

Forward guidance

Funding for lending scheme