Monetary Policy Flashcards
Define monetary policy
Monetary policy involves changes in interest rates, the supply of money, and credit and exchange rates to influence the economy
What is the role of money.
Medium of exchange A store of value Standard of deferred payments Unit of account Hard to counterfeit Divisible
How does a higher interest rate effect the market of loanable funds?
Higher interest rates - more saving, less borrowing
What is the role of a central bank?
Monetary policy
ensure stability of banking system
Issue money
Give strengths of monetary policy
It avoids politics because the central Bank of England is independent
It avoids national debt
CPI data is easy to calculate compared to GDP
Give weaknesses of monetary policy
Time lags
It is not very effective when there are big recessions - liquidity trap
Does not help with inequalities or environment
If it is wrong it adds to the problem
How can monetary policy affect the exchange rate?
When Interest rates go up , it attracts hot money, so there is more demand for the pound and so the value of the pound goes up
Is monetary policy effective in dealing with a big recession?
No
When money is cheap monetary policy does not work well
Even if interest rates go up people will still save because they are so scared - no confidence
The more they save - less consumption - less AD - making the situation worse
Could be more effective to use fiscal policy (expansionary)
Is monetary policy always effective in fighting inflation?
No it isn’t when it is cost push inflation
What is the quantity theory of money?
Quantity theory of money stated that the money supply and price level in a n economy are in direct proportion to one another. There is a change in the supply of money there is a propositional change in the price level and vice versa
MV=PQ
What is quantitate easing?
It is increasing the money supply when interest rates are already low by a central bank
It is an unconventional form of monetary policy used to stimulate the economy when the interest rates are low
What is funding for lending?
It is a scheme designed to encourage banks to lend more to households and businesses
It does this by providing funds to these banks for an extended period, with the quantity if funding provided likening to their lending performance
What is forward guidance?
It is a verbal assurance to let households and firms know when the interest rates are going to increase
What are the factors considered by the MPC hen setting the bank rate(external and internal)?
Internal GDP growth Level of debt Consumer confidence CPI index Size of the output gap
External
Global climate
Main trading patterns
What is the monetary policy transmission mechanism?
It is the process by which asset prices and general economic conditions are affected as a result of monetary policy decisions.
Such decisions are intended to influence the aggregate demand, interest rates, and amounts of money and credit in order to affect overall economic performance.
Bank of England’s actions impact the real economy - unemployment , GDP
