Monetary policy Flashcards
what are the four functions of money
medium of exchange
store of value or wealth
unit of account (allows to compare relative value)
standard of deferred payment (allows people to pay later because confidence about future value of money)
money supply d
the total amount of money circulating in the economy
liquidity d
the degree to which financial assets can be easily converted into money
narrow money d
notes, coins and balances available for normal financial transactions
broad money d
money held in banks and building societies that is not immediately accessible
what is the demand for holding money determined by
income (higher income, greater demand for money)
rate of interest (higher rate of interest, higher opportunity cost of holding money)
how do you show interest rates and the money supply on a graph
y = interest rate
x = quantity of money
demand for money is sloping demand
money supply is vertical
what will an increase in income do to the demand for money
shift the demand to the right (DM1 to DM2)
base rate d
the interest rate a bank sets to determine its lending and borrowing rates
will a bank charge above or below the base rate to savers
below
will a bank charge above or below the base rate to borrowers
above
nominal interest rates d
interest rates not adjusted for inflation
real interest rates d
the nominal rate of interest minus the rate of inflation
monetary policy objective d
a target or goal that the Bank of England aims to meet
policy instrument d
a tool or method of control used to try to achieve an objective
what is the main objective of UK monetary policy
controlling inflation
what was the monetary policy from 1985-1992
high exchange rate to reduce the relative prices of imported food, which reduces the cost-push inflation
how does the quantity of money holdings relate to inflation
if the quantity of money holdings increases there is excess demand which leads to demand-pull inflation
what are the two monetary policy instruments used to influence the supply of money
monetary base control (limits on banks to supply credit)
open market operations (OMOs)
monetary base control (reserve asset ratios) d
restrictions imposed by the Bank of England on the ability of high street banks to supply credit
open market operations (OMOs) d
the buying and selling of government bonds in exchange for money to either increase or decrease the money supply
what monetary instrument does the government use to affect the demand for money
interest rate
how do high interest rates affect the money supply
bank loans become more expensive so firms seek to repay existing loans, this reduces money supply
what does the target inflation rate being symmetrical mean
it is as undesirable to undershoot the central target as it is to overshoot it
Eurozone d
the countries in the EU that have adopted the single currency Euro