Monetary Policy

Question 1

Functions of a central bank

Answer 1

To maintain financial stability

Help the government maintain macroeconomic stability

Question 2

Objectives of monetary policy

Answer 2

Key aim is the government’s inflation target

2%

It is achieved through bank rate

Which is the interest rate set by the central Bank of England that affects it rest rates set by banks and other financial institutions such as building societies across the economy

Question 3

Effect of interest rates on other objectives

Answer 3

Higher unemployment due to lack of spending

Lower short term economic growth caused by reduced demand

Growth of supply side of the economy is limited due to to lack of investment in productive capacity

Lower tax revenue collected due to a lower economic activity

Reduced levels of exports due to a likely rise in the exchange rate, which has effects on economic growth and employment

Question 4

Limitations on interest rates controlling the economy

Answer 4

Time lags in their effectiveness
Uncertain effects
When interests rates are low further cuts may not be possible
Hanged have to be large to have any significant effect

Question 5

QE

Answer 5

Increasing the money supply buy government buying bonds so as to increase liquidity within the economy and thus increase borrowing