Topic 11- Monetary policy

Question 1

Monetary policy

Answer 1

The decisions made by the government regarding monetary variables such as money supply and interest rates to manage the economy

Question 2

Control of inflation

Answer 2

Inflation target: To achieve low inflation at a rate of 2%.

• Bank of England will allow the inflation to fluctuate between 1-3%
• If inflation rate is increasing and economy is growing too quickly central bank of England increase interest rates
• If inflation rate is decreasing and economy is growing slowly> Interest rates will decrease> increase borrowing>increase consumption

Question 3

Criticisms of inflation targetting

Answer 3

-Inflation target is too narrow and should be based on wider range of variables e.g asset, commodity prices

Question 4

If the Bank of England cuts interest rates, it will tend to increase overall demand in the economy. Affects of lower interest rates

Answer 4

• Lower interest rates make it cheaper to borrow; this -encourages firms to invest and consumers to spend.
• Lower interest rates reduce the cost of mortgage interest repayments. This gives households greater disposable income and encourages spending.
• Lower interest rates reduce the incentive to save.
• Lower interest rates reduce the value of the Pound, making exports cheaper and increases export demand.

Question 5

Quantitative easing

Answer 5

Is when the central Bank increase the money supply to buy government bonds or other securities so increasing liquidity i the banking system

Question 6

Aim of quantitative easing

Answer 6

• Increase bank lending leading to higher investment. This should stimulate economic growth
• Increase inflation. Quantitative easing may be pursued when there is underlying core-inflation close to 0%. 0% inflation and deflation can lead to lower spending and economic growth. Therefore, aiming for a higher inflation rate, can encourage spending.