1) Monetary Policy - MMT

Question 1

What is one of the main jobs of the government?

Answer 1

Is to effectively manage their country’s economy

Question 2

In developed economies what are the 5 main macroeconomic objectives to which governments aspire?

Answer 2

Economic growth, stable prices, low unemployment rates, stable balance of payments and a relatively fair distribution of income

Question 3

What is monetary supply concerned with?

Answer 3

Controlling the supply of money in the economy, in other words, how much money is circulating in an economy at a particular time

Question 4

In most modern (developed) economies, who is monetary policy carried out by?

Answer 4

They ask their central banks to do it for them

Question 5

In the UK, who conducts monetary policy?

Answer 5

The Bank of England

Question 6

In the US, who conducts monetary policy?

Answer 6

The Federal Reserve Bank

Question 7

In the Eurozone, who conducts monetary policy?

Answer 7

The ECB

Question 8

Are the central banks independent to the government?

Answer 8

Although these organisations are technically independent, the government sets the targets that they are expected to achieve

Question 9

How do monetary and fiscal policy differ objective wise?

Answer 9

Fiscal Policy is used to take a wide range of macroeconomic objectives, whereas the role of monetary policy is usually highly specific

Question 10

What is monetary policy’s objective?

Answer 10

It is usually highly specific to meet the inflation rate target that the government thinks is optimal for achieving their stable prices objective

Question 11

In the UK what is the target rate of inflation?

Answer 11

2% with an acceptable margin of + or -1% of this level, so in the UK the Bank of England is tasked with ensuring an inflation rate of 1% minimum and 3% maximum

Question 12

What is the Bank of England fail to teach the inflation target rate?

Answer 12

They have to answer to the government

Question 13

What are other countries’ inflation target rate in relation to the UK?

Answer 13

Targets in other developed countries are roughly similar to the UK

Question 14

Why are stable prices such an important objective for governments?

Answer 14

When inflation is low, stable and predictable, it helps people and businesses to better plan their savings, spending and investment. That helps the economy grow, in turn creating jobs and prosperity. When inflation is too high the opposite occurs, uncertainty is common and both business and consumer confidence is harmed. Equally inflation can be too low or even negative (deflation), this often reflects extremely low levels of AD in an economy leading to negative growth or recession

Question 15

Why is it good when inflation is low?

Answer 15

When inflation is low, stable and predictable, it helps people and businesses to better plan their savings, spending and investment. That helps the economy grow, in turn creating jobs and prosperity.

Question 16

Why is it bad when inflation is too high?

Answer 16

When inflation is too high the opposite occurs, uncertainty is common and both business and consumer confidence is harmed.

Question 17

Why is deflation bad?

Answer 17

Equally inflation can be too low or even negative (deflation), this often reflects extremely low levels of AD in an economy leading to negative growth or recession

Question 18

What are the range of tools central banks have to carry out their monetary policy and control the money supply? (4 things)

Answer 18

• interest rates
• quantitative easing (QE)
• the reserve requirement
• the exchange rate

Question 19

How many central banks are there in a country, and how many commercial banks are there?

Answer 19

There is only one central bank in each country (or group of countries due to the case of the Eurozone). In contrast, there are many commercial banks.

Question 20

What a 2 roles of the central bank? (In detail)

Answer 20

Is the supreme body of the country’s banking system, they oversee the work of commercial banks. This means that they set the rules, regulations and policies and then make sure commercial banks follow those guidelines. In addition, central banks act as a bank to commercial banks, they help commercial banks conduct business and commercial banks keep their bank accounts at the central bank

Question 21

What are the 2 roles of the central bank?

Answer 21

• The central bank is the supreme body of the country’s banking system
• a bank to commercial banks

Question 22

How does the central bank act as the supreme body of the country’s Banking system?

Answer 22

Is the supreme body of the country’s banking system, they oversee the work of commercial banks. This means that they set the rules, regulations and policies and then make sure commercial banks follow those guidelines.

Question 23

How does the central bank act as a bank to commercial banks?

Answer 23

central banks act as a bank to commercial banks, they help commercial banks conduct business and commercial banks keep their bank accounts at the central bank

Question 24

What is the best known and most common method for controlling money supply?

Answer 24

Interest rates

Question 25

In the UK what is the key interest rate (known as the base or bank rate)?

Answer 25

Is the interest rate the Bank of England pay to commercial banks that hold money with them (i.e. all UK based commercial banks)

Question 26

How does the base rate/bank rate influence people?

Answer 26

This rate influenced the rates those banks charge people to borrow money or pay on their savings

Question 27

What happens if the base rate increases?

Answer 27

Bands will increase the rates they charge to borrowers or pay to savers

Question 28

What does QE involve?

Answer 28

The Bank of England purchasing government bonds (commonly held as investments by financial institutions)

Question 29

What is the result of quantitative easing?

Answer 29

In practice, this gives the banks more cash, increasing the money supply

Question 30

What is the reserve requirement?

Answer 30

It is essentially a rule, set by the Central Bank, telling commercial banks what % of their deposits they need to keep as cash. Increasing the reserve requirement restricts the money that commercial banks can create

Question 31

How are exchange rates linked to monetary policy?

Answer 31

The exchange rate (eg the value of £1 v 1US$) is not nowadays a tool of monetary policy as it is not directly set by central banks, however their actions regarding interest rates can have major impact on exchange rates and central banks are always conscious of this when making changes to interest rates

Question 32

Conclusion: what is the aim of monetary policy and who is it carried out by?

Answer 32

Monetary policy and to control the money supply in an economy with the objective of achieving stable prices. In most economies this work is done on behalf of the government by the central bank