Th4.5: Changes in Interest Rate and Supply of Money

Question 1

What is an example of a domestic reason as to why the central bank would change interest rates and money supply?

Answer 1

to control inflation

Question 2

What is an example of a global reason as to why the central bank would change interest rates and money supply?

Answer 2

low exchange rate or change in world commodity prices

Question 3

What is a fall in the bank rate likely to do?

Answer 3

increase the supply of money because it will mean there is more demand for loans

Question 4

It can be argued that central banks don’t have complete control over…

Answer 4

the money supply because they cannot control the ability of the financial system to create credit

Question 5

What has also made it harder to control domestic money supply?

Answer 5

the globalisation of the financial market

Question 6

What is the consensus?

Answer 6

the consensus is that central banks should allow inflation caused by supply side shocks but manage demand side inflation

Question 7

What led to the policy of quantitative easing?

Answer 7

following the Global Financial Crisis, many banks were concerned with deflation rather than inflation