Monetary Policy - Economic Objectives

Question 1

What are the 3 economic objectives monetary policy can be linked to

Answer 1

Employment
Economic growth
Balance of payments

Question 2

How can monetary policy be used to maintain employment

Answer 2

low interest rates mean cost of borrowing is reduced

this means people spend more money and invest more

this increases level of demand and GDP and decrease cyclical unemployment

Question 3

How can monetary policy be used to achieve economic growth

Answer 3

lower interest rates mean cost of borrowing is reduced meaning that people spend more money and invest more

increases total demand and gdp

Question 4

How can monetary policy be used to have a balance of payments

Answer 4

a low interest rate weakens exchange rate

thus

increased international competitiveness of exports since they are cheaper (increased exports)

BUT imports more expensive