Monetary policy

Question 1

what are the four functions of money

Answer 1

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)

Question 2

money supply d

Answer 2

the total amount of money circulating in the economy

Question 3

liquidity d

Answer 3

the degree to which financial assets can be easily converted into money

Question 4

narrow money d

Answer 4

notes, coins and balances available for normal financial transactions

Question 5

broad money d

Answer 5

money held in banks and building societies that is not immediately accessible

Question 6

what is the demand for holding money determined by

Answer 6

income (higher income, greater demand for money)

rate of interest (higher rate of interest, higher opportunity cost of holding money)

Question 7

how do you show interest rates and the money supply on a graph

Answer 7

y = interest rate
x = quantity of money
demand for money is sloping demand
money supply is vertical

Question 8

what will an increase in income do to the demand for money

Answer 8

shift the demand to the right (DM1 to DM2)

Question 9

base rate d

Answer 9

the interest rate a bank sets to determine its lending and borrowing rates

Question 10

will a bank charge above or below the base rate to savers

Answer 10

below

Question 11

will a bank charge above or below the base rate to borrowers

Answer 11

above

Question 12

nominal interest rates d

Answer 12

interest rates not adjusted for inflation

Question 13

real interest rates d

Answer 13

the nominal rate of interest minus the rate of inflation

Question 14

monetary policy objective d

Answer 14

a target or goal that the Bank of England aims to meet

Question 15

policy instrument d

Answer 15

a tool or method of control used to try to achieve an objective

Question 16

what is the main objective of UK monetary policy

Answer 16

controlling inflation

Question 17

what was the monetary policy from 1985-1992

Answer 17

high exchange rate to reduce the relative prices of imported food, which reduces the cost-push inflation

Question 18

how does the quantity of money holdings relate to inflation

Answer 18

if the quantity of money holdings increases there is excess demand which leads to demand-pull inflation

Question 19

what are the two monetary policy instruments used to influence the supply of money

Answer 19

monetary base control (limits on banks to supply credit)

open market operations (OMOs)

Question 20

monetary base control (reserve asset ratios) d

Answer 20

restrictions imposed by the Bank of England on the ability of high street banks to supply credit

Question 21

open market operations (OMOs) d

Answer 21

the buying and selling of government bonds in exchange for money to either increase or decrease the money supply

Question 22

what monetary instrument does the government use to affect the demand for money

Answer 22

interest rate

Question 23

how do high interest rates affect the money supply

Answer 23

bank loans become more expensive so firms seek to repay existing loans, this reduces money supply

Question 24

what does the target inflation rate being symmetrical mean

Answer 24

it is as undesirable to undershoot the central target as it is to overshoot it

Question 25

Eurozone d

Answer 25

the countries in the EU that have adopted the single currency Euro