Monetary Policy

Question 1

What is monetary policy?

Answer 1

Central bank’s decisions over the supply of money in the economy, interest rates and exchange rates

Question 2

How do the central bank influence interest rates??

Answer 2

By raising the base rate, the banks they lend money to raise their interest rates in turn

Question 3

Why do the central bank use quantitative easing??

Answer 3

To create more money in the economy, to increase consumption

Question 4

What type of monetary policies are increased and decreased interest rates??

Answer 4

Increase interest rates= deflationary monetary policy

Decreased interest rates= inflationary monetary policy

Question 5

Why does the bank use inflationary monetary policy??

Answer 5

To improve the economy and increase the components of AD

Question 6

What is the link between interest and exchange rates??

Answer 6

They move in the same direction- higher interest rates mean more return on savings, so more money transferred to £s, so the demand for £s go up and they are more expensive to purchase (for other currencies)

Question 7

How does interest rates affect individuals??

Answer 7

Higher interest rates mean less borrowing of money, through loans and credit, reducing the amount of consumption

Question 8

How do interest rates affect businesses??

Answer 8

New and existing loans become more expensive, so business costs increase, reducing profit margins and potentially decreasing employment, which has a knock on effect to consumption of individuals