Yr1 Monetary Policy

Question 1

PART 1

Answer 1

MONETARY POLICY

Question 2

What are the 3 policy instruments when controlling the macro economy using policies?

Answer 2

1. Monetary policy
2. Fiscal policy
3. Supply-side policy

Question 3

What does monetary policy consist of?

Answer 3

1. Money supply
2. Interest rates
3. Exchange rates

Question 4

4 main gov targets?

Answer 4

1. Stable low inflation
2. Sustainable economic growth
3. High employment/ low unemployment
4. Sustainable position in the balance of payments

Question 5

Who is monetary policy set by + who maintains its level?

Answer 5

Monetary Policy Committee (Bank of England) set the level since 1997 and the government are in charge of maintaining it

Question 6

What is monetary policy used to control in order of importance?

Answer 6

1. Inflation
2. Economic growth
3. Unemployment
4. B of P

Question 7

What is the difference between the definition of interest rates and real interest rates?

Answer 7

Interest rates
- cost of borrowing / reward for saving

Real interest rates
- money rate of interest > rate of inflation

Question 8

Impact of high interest on
1. Firms
2. Consumers
3. Borrowing

Answer 8

1. • decr ability + delayed investments
   • liquidation (loans)
2. • decr disposable income
   • decr consumption
   • will save

3.
- decrease

Question 9

Impact of low interest rates on
1. Firms
2. Consumers
3. Borrowing

Answer 9

1. • more investment
2. • incr disposable income
   • incr consumption
3. • increase

Question 10

What is impacted if interest rates change?

Answer 10

• housing market
• disposable income
• demand for credit
• consumer + business confidence
• business investment
• the exchange rates

Question 11

MONEY SUPPLY

1. Definition
2. 2 types of money involved in the money supply
3. 2 types of money supply tools
4. How quantitative easing works
5. How quantitative tightening works

Answer 11

1. Total amount of money in the economy
2. Narrow money M) (normal money e.g. cash and notes available for normal transactions) and broad money M4 (money held in banks and not immediately accessible)
3. Quantities easing and quantitative tightening
4. • gov invest in private shares/assets
   • incr price of shares > decr yield
   • less people invest in shares and instead consume
   • private has more money to invest also
   • incr AD due to incr spending + incr income
   • 2% inflation rate maintained
5. Gov sells assets to regain money + decr money supply in economy

Question 12

EXCHANGE RATES

1. Definition
2. 2 types and definitions

Answer 12

1. The price at which one currency exchanges for another
2. • floating exchange rate (no gov intervention), D and S determine rate)
   • fixed exchange rate (gov intervention, use their currency to control demand and supply within a certain range)

Question 13

Strong exchange rate
1. Adv
2. Disadv

Answer 13

1. • cheaper imports for consumers
   • lower production costs for producers
   • lower inflation
   • potentially lower interest rates
2. • incr trade deficit
   • slower economic growth
   • impacts upon business confidence + capital investment

Question 14

Controlling the economy
1. Expansionary monetary policy
2. Contractionary monetary policy

Answer 14

1. • decr interest rates
   • incr quantitative easing
   • depreciation/ devaluation of the exchange rate
2. • incr interest rates
   • reduce money supply
   • appreciation/ revaluation of the exchange rate

Question 15

Evaluation of monetary policy
1. Adv
2. Disadv

Answer 15

1. • impacts C, I, (X-M)
   • free from political interference
   • can be adjusted quickly
   • immediate effect on confidence
   • dual impact on AD and AS

2.
- demand pull inflation
- time lag (18 months)
- reaction may not be as expected
- interest rates rarely fall below zero

Question 16

If monetary policy works depends on…

Answer 16

• level of economic growth
• level of consumer / business confidence
• size of multiplier effect
• size of change
• starting point (interest rates)
• other affects / factors (internal / external)