Monetary Policy

Question 1

Stabilisation Policies

Answer 1

Government or central bank policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps.

Question 2

• Expansionary policies

Answer 2

Policy actions intended to increase planned spending and output. This policy actions are intended to close the recessionary gap.

Question 3

• Contractionary policies

Answer 3

Policy actions intended to close the expansionary gap by reducing planned spending.

Question 4

Monetary Policy

Answer 4

• Changes in the money supply/interest rate (by the central bank)

Question 5

OMO Sale

Answer 5

The CB sells bonds to the public -> Less money in circulation -> MS decreases

Question 6

OMO Purchase

Answer 6

The CB buys bonds from the public -> More money in circulation -> MS increase

Question 7

A steeper PAE curve…

Answer 7

Leads to a flatter IS curve and more efficient monetary policy

Question 8

The Liquidity Trap

Answer 8

• A situation in which changes in the money supply do not change the rate of interest (perfectly elastic money demand, flat MD curve).
• Monetary policy has no impact on the economy (C, I, PAE, Y).
• Liquidity traps can occur when interest rates are close to zero.