Monetary Policy

Question 1

Define monetary policy

Answer 1

A group of 9 bankers that use different methods to control inflation

Question 2

Define interest rates

Answer 2

The price of money

Question 3

What is a central bank

Answer 3

A central bank is a financial institution given control over the production and distribution of money and credit for a nation

Question 4

What is the inflation target of the UK

Answer 4

2% +/- 1%

Question 5

What is expansionary monetary policy

Answer 5

When to create economic growth the banks make the interest rates lower so there is increase C & I and less saving, this will increase inflation

Question 6

What is contractionary monetary policy

Answer 6

When the banks increase the interest rates, so there is less spending and more saving, reducing AD and inflation (inverse of expansionary)

Question 7

How do interest rates effect AD

Answer 7

Increased interest rates = earn more from saving and spending is expensive (e.g. loans), so C & I is reduced when there are high interest rates, so AD will reduce

Question 8

What is Quantitate Easing (QE)

Answer 8

The gov. creates bonds that can be traded with the banks for money, so the gov. can spend more, and they are then bought back and nobody looses out but there is “more” money in the economy

Question 9

What are negative interest rates

Answer 9

The BoE can make the interest rates negative so people are paid to spend and charged to save, this will incentivise spending and disincentives saving massively

Question 10

What effects the impact of monetary policy

Answer 10

• Credibility of central bank,
• The state of the
  economy/confidence,
• How close interest rates are to zero
• The level of indebtedness (more debt means MP is more effective, though rate rises are also more painful)

Question 11

What does MP’s ability to reduce unemployment depend on

Answer 11

The type of unemployment (only works for cyclical unemployment)

Question 12

What does MP’s ability to reduce inflation depend on

Answer 12

The type of inflation (more effective on demand-pull inflation, can tackle cost-push but may be very painful)

Question 13

How do time lags effect MP

Answer 13

MP has a shorted time lag than fiscal

18-24 months for the full impact of a change in interest rates

Question 14

How does the elasticity of the AS curve effect the impact of MP

Answer 14

If the AD curve shifts along the inelastic part of the LRAS curve then prices will change more rapidly than if it moves along the elastic part