Moneyary Policy Flashcards
What is expansionary monetary policy
Increasing of AD
By decreases intrest rates (more borrowing)
And/or
Quantitive Easing (more e-commerce money creation)
What is it know as when using 2 monetary policies together
Duel MonPolicy
How much did the MPC put intrest rates down to in COVID time
From 0.75% to 0.1%
How much worth of QE was put into the economy in COVID times
£495bn of QE
What does decrease in interest rate lead on to
More borrowing as it’s cheaper —> boosting the value of wealth ( pensions, housing) —> less people saving as it’s less rewarding —> more consumption —> AD rising
What is contractionary Monetary Policy
Where interest rates are increased so that AD is decreased
How does increase in interest rates cause AD fall
Interest rate increase —> less people borrowing —> more people saving —> less consumption in the economy —> AD decrease
How does QE work
Banks issue bonds which BofE buy
This increase the price of the bonds and creates money in banking system
As a consequence a wider range of interest rates fall and loans become cheaper
Businesses and people can then borrow more and spend less to repay depts
Therefore consumption and investment increase
Therefore growth in the economy
QE breakdown
What does the bank issuing bond which the BofE buy do to the prices of the bonds and what does it cause
This increase the price of the bonds and creates money in banking system
QE breakdown
What does the increase in prices of bonds and increases of money in the banking system do to interest rates and loans
It causes a wider range of interest rate falls and loans become cheaper
QE breakdown
What does fall in wider interest rates and cheaper loans cause businesses and people to do
Businesses and people can then borrow more and spend less to repay depts
what does Businesses and people borrowing more and spending less to repay depts do to C and I and what does it cause
It Therefore causes consumption and investment increase
Therefore growth in the economy
What is quantitative tightening
Tightening of the money supply and driving up of interest rates to reduce AD and control inflation
(Used by UK after Covid to control the 11.1% inflation
What did the UK raise interest rates to after COVID when they had the treat of high inflation
0.1% to 5.25%
What is an issue with monetary policy
There is a time lag issue
