Term 2 Week 8-9: Stabilisation Policy

Question 1

What do monetary and fiscal policy involve the adjustment of (2)

Answer 1

-Monetary policy involves the adjustment of i and unconventional MP
-Fiscal policy responses involve the adjustments of G and T

Question 2

How may monetary policy change for large and small economies (1,2)

Answer 2

-In large economies, the main transmission channel of IR changes goes through investments

-In small economies, the exchange rate is a very important channel, as international investors want to hold and trade financial assets from around the world
-A decrease in the policy rate -> decrease in demand for bonds -> depreciation of ER -> rising CA -> rising AD

Question 3

What is the favoured stabilisation tool + limitations (1,2)

Answer 3

-Monetary policy is the favoured stabilisation tool, as it can be changed more frequently than FP

Limitations included:
-The zero lower bound
-Countries without their own currency

Question 4

What are some unconventional monetary policy (3)

Answer 4

-Influencing expected inflation
-Quantitative easing
-Negative interest rates