Monetary policy pt2

Question 1

Interest rates

Answer 1

The cost of borrowing money. They are expresses as a percentage of the total borrowed

Question 2

Monetary policy notes

Answer 2

-If MPC increases bank rate by 1% this means that interest rates will increase but by a lesser amount
-Affects 3 components of AD- C, I, Nx
-Can be contractionary monetary policy: decreases AD (uses increased interest rates)
-Can be expansionary monetary policy: increases AD (uses decreased interest rates)

Question 3

Contractionary monetary policy chain of reasoning

Answer 3

Higher interest>Lower investment>Lower AD>Lower PL

Higher interest>Lower consumption>Lower AD>Lower PL

Higher investment>Higher demand for currency>Appreciated pound>X less competitive, M cheaper>Lower Nx>Lower AD>Lower PL

Question 4

Expansionary monetary policy chain of reasoning

Answer 4

Lower interest>Higher investment>Higher AD>Higher PL

Lower interest>Higher consumption>Higher AD>Higher PL

Lower investment>Lower demand for currency>Depreciated pound>X more competitive, M more expensive>Higher Nx>Higher AD>Higher PL

Question 5

Expansionary monetary policy notes

Answer 5

-Leads to demand pull inflation (also inflationary pressures)
-Leads to a boost in AD (in the SR) and therefore increased GDP, economic growth in the SR