Topic 13-Demand Side Policies- Monetary Policy

Question 1

What a decrease in interest rates by the mpc of the Bank of England is needed for

What an increase in interest rates by the mpc of the Bank of England is needed for

Answer 1

• low inflation/deflation
• low employment
• to achieve 2% inflation rate

-high employment could cause overheating>push prices up without any resulting benefits in terms of higher real output

Question 2

What low interest rates do to AD

-for consumers

Answer 2

• decrease in mortgage payments (consumption increases)
• increase in purchases on credit(credit repayments decrease if interest rates are low) so increase in consumption
• savings decrease so people spending more

Question 3

What low interest rates do to AD

Investment

Exchange rate

Answer 3

-firms can borrow more money cheaply therefore they will borrow more money and invest more in their firms (cost of borrowing low)

• exchange rate depreciates>exports increase
• imports become less competitive and will decrease

Question 4

What low interest rates do to AD

Curve

Answer 4

• AD shifts to the right
• price levels increase (inflation)
• economic growth occurs therefore increase in output more people are needed to produce this output so unemployment decreases (Y1 to Y2)

Question 5

Evaluation of monetary policy

Answer 5

• shouldn’t assume that when interest rates are low consumption and investment will automatically rise depends upon confidence of consumer and business people aswell
• when interest rates go below a certain floor doesn’t lead to a large increase for loans
• effect of the monetary policy depends upon the position of the economy to begin with
• some peoples spending not sensitive to interest rates

Question 6

Current inflation rate

Answer 6

0%

Question 7

Monetary policy committee

Bank rate

Transmission mechanism of monetary policy

Answer 7

The body within the Bank of England responsible for the conduct of monetary policy

The interest rate that is set by the monetary policy committee of the Bank of England to influence inflation

The process by which a change in the bank rate affects inflation

Question 8

Quantitative easing
Definition

Aim

Answer 8

• A process by which liquidity in the economy is increased when the Bank of England purchases assets from banks.
• to encourage lending by the banks which had reduced during the credit crunch (made it difficult for firms to borrow)
• bank of England increase money>increase AD

Question 9

Monetary policy definition

Answer 9

The manipulation of Monterey variables e.g interest rates in order to achieve macro economic objectives