POLICIES - MONETARY POLICY

Question 1

WHAT IS MONETARY POLICY

Answer 1

changes to teh interest rate,money supply and exchange rate by the central bank (OF AN ECONOMY

in order to influence AD

Question 2

is it demand or supply side

Answer 2

demand

Question 3

unlike fiscl policy moentary policy is enacted by who

Answer 3

central bank independent to governemtn

Question 4

whats mandate/PRIMARY GOAL for CB around teh world

Answer 4

control inflation / HIT INFLATION TARGET

Question 5

whats the goal for inflation

Answer 5

2% +-1

Question 6

can be both exapansionary or contractionary t/f

Answer 6

t

Question 7

what is expansionary moentary policy

Answer 7

policie to increase AD

Question 8

CONTRACTIONATRY monetary policy

Answer 8

policies to aim to reduce AD

Question 9

Main reason use of exapnsooary or contractionary monetary policy

Answer 9

reach inflation target by either increasing or decreasing if below or above target

Question 10

what are the 3 aims of expansionary monetary policy

Answer 10

increase inflation(CBmandate

increase economic growht

reduce unemployment

(we get the last 2 when AD increases)

Question 11

also withincentral bank mandate is macro econ stability how might they do this

Answer 11

• achieving other macro econ obj

e.g increase econ growth

Question 12

what are the 4 aims of contractionary monetary policy

Answer 12

reduce inflation (mandate)

prevent asset/credit bubbles

reduce excess debt and promo saving

reduce CA deficit

Question 13

why is primary reason CB use contractionary MP.

+ reduction in Ad can reduce

Answer 13

HIT INFlation target

if its beyond target and needs to be reduced

reduction in AD can reduce demand pull inflation

Question 14

in terms of contarctionary policy macro econ stability is another major goal this may involve protecting the

Answer 14

financial sector

Question 15

since contractionary monetary policy can protect financial sector what are teh other two reasons contractionary mp used

Answer 15

prevent asset/credit bubbles

reduce excess debt and promo saving

Question 16

what is credit

Answer 16

borrowing by hh and businesses

Question 17

explain why we wanna prevent asset and credit bubbles

Answer 17

we want to guard against financial collpase

through prevention of excessive growth of house prices and credit

f theres too much house price growth and oo much credit growth - whihc is unsustainable

theres a risk of a financial sector crash and potential recession

Question 18

reducing excess debt and promoting saving is related to

Answer 18

balancing economic growht

Question 19

explain how reducing excess debt and promo savng can be done by MP

Answer 19

if econ growht very debt fuelled higher IR cn reduce incentive to take out debt and thus more sustaiable growht promo

promo saving - savings low is dangerous for hh and bs higher ir provide incentive to save

Question 20

EXPLAIN how Contractionary MP can reduce CA deficit

Answer 20

as AD falls growth falls, incomes fall ,therfore less sspending on ipmorts which in theroy will narrow CA deficit