Topic 4 - Central banks and monetary policy Flashcards
What is the function of the central bank(4)
Issue money
Ensure stability in the banking system
Lenders of last resorts
Monetary policy
What is meant by central banks being lenders to last resort
It means that they are there to ensure commerical banks and the government have enough funding to recover from lossess, etc
What is monetary policy
The dealings of credit availability and interest rates
What are the key roles of monetary policy(3)
Control inflation
Financial stability
Credit availability
What are some monetary policy objectives(3)
Keep low, stable inflation
Sustainable and stable eco gorwth
Low unemployment
What are some ‘instruments, used by the monetary policy committee
Monetary base control - where they ensure and make banks have a certain amount of assets in reserve
Open market regulations - Where they buy or sell gov bonds in exchange for moeny to alter money suppy
Who is the montary policy controlled by
The bank of england
What do the BoE consider when setting interest rates(3)
GDP growth and spare capacity Bank lending and consumer credit House and share (asset) prices Confidence of firms and consumers Wage inflation Unemployment stats Trends in foregin markets - as interest rates affect exchange rates
How do interest rates affect exhange rates
If interest rates were higher, foreign investors would be atttracted to save in the UK’s banks,etc meaning the need for the UK currency is more (its demand increases) increasing its value
What do changes in interest rate affect(5)
Asset prices Disposable incomes Demand for credit Business investment Confidence
What is the main link between interest rates and credit
Higher interest, lower credit availabilty and vice versa
What is the link between interest rates and bonds
The higher the interest rates,c ause the returnon bonds to change, changing their attarctivenes
What is a liquidity trap
Where interest rates are so low, people would rather have their money as cash (more liquidable) rather than in things like banks as they’ll get minimal return
What can liquidity traps be characterised by(4)
Low Inflatiosn
Low interest rates
Slow or negative eco growth
Preference for saving rather tahn spending
What does a liquidity trap do to monetary policy and its influence on AD
It makes its influence ineffective
