Monetary policy Flashcards
What is monetary policy?
Involves controlling the macroeconomy via changes in the monetary variables such as the money supply or interest rates
What is an interest rate?
The cost of borrowing or the reward of saving
If interest rates are high, what will happen to AD? Why?
Fall
Borrowing has become more expensive
If interest rates are low, what will happen to AD? Why?
Rise
Borrowing has become cheaper
What is the real interest rate?
The money rate of interest minus the rate of inflation
What happens when the banks base interest rate rises?
High street banks will increase their rates = discourages loans = discourages investment = encourages consumers to save = decrease in AD
What are the limitations of using interest rates to influence AD?
Time lag
Consumer confidence
How long is the time lag associated with changing the interest rate?
2 years
What are the impacts of changes in interest rates on AD? (6) (HDCCIE)
The housing market Disposable incomes for mortgage payers Consumer demand for credit Consumer and business confidence Business investment Effects upon the exchange rate
How does the change of interest rates impact the housing market? What happens to AD
High interest rate = higher cost of mortgages = fall in AD
How does the change of interest rates impact the disposable income of mortgage payers? What happens to AD?
Higher interest rate = lower disposable income = fall in AD
How does the change in interest rates impact the consumer demand for credit? What happens to AD
Higher interest rate = higher cost of credit = fall in AD
How does the change in interest rates impact consumer and business confidence? What happens to AD?
Lower interest rate = better confidence = rise in AD
How does the change in interest rates impact business investment? What happens to AD?
Higher interest rate = low confidence = less investment = fall in AD
How does the change in interest rates impact the effects upon the exchange rate? What happens to AD?
Higher interest rate = appreciation = more imports = fall in AD
What is the repo rate?
The interest rate that is set by the MPC in order to influence inflation
What is the CPI?
A measure of the price level
What is the money supply?
The total amount of money in an economy
What is an exchange rate?
The price of a currency expressed in terms of another currency
What is narrow money?
Notes, coins and balances available for normal transactions
What is broad money?
Money that is held in banks and building societies but that is not immediately accessible
What is hot money?
Money that is liable to rapid transfer from one country to another?
If the UK increases its interest rates, what will happen to the exchange rate? Why?
Higher interest rate = attracts hot money = increase demand for pounds = appreciation
What are the advantages for a strong pound? (4)
Cheaper imports for consumers
Lower cost of production
Lower inflation
Lower interest rates
What are the disadvantages for a strong pound? (3)
Increases the trade deficit
Slow economic growth
Decrease in investment
