1) Monetary Policy - MMT Flashcards
What is one of the main jobs of the government?
Is to effectively manage their country’s economy
In developed economies what are the 5 main macroeconomic objectives to which governments aspire?
Economic growth, stable prices, low unemployment rates, stable balance of payments and a relatively fair distribution of income
What is monetary supply concerned with?
Controlling the supply of money in the economy, in other words, how much money is circulating in an economy at a particular time
In most modern (developed) economies, who is monetary policy carried out by?
They ask their central banks to do it for them
In the UK, who conducts monetary policy?
The Bank of England
In the US, who conducts monetary policy?
The Federal Reserve Bank
In the Eurozone, who conducts monetary policy?
The ECB
Are the central banks independent to the government?
Although these organisations are technically independent, the government sets the targets that they are expected to achieve
How do monetary and fiscal policy differ objective wise?
Fiscal Policy is used to take a wide range of macroeconomic objectives, whereas the role of monetary policy is usually highly specific
What is monetary policy’s objective?
It is usually highly specific to meet the inflation rate target that the government thinks is optimal for achieving their stable prices objective
In the UK what is the target rate of inflation?
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
What is the Bank of England fail to teach the inflation target rate?
They have to answer to the government
What are other countries’ inflation target rate in relation to the UK?
Targets in other developed countries are roughly similar to the UK
Why are stable prices such an important objective for governments?
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
Why is it good when inflation is low?
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.
Why is it bad when inflation is too high?
When inflation is too high the opposite occurs, uncertainty is common and both business and consumer confidence is harmed.
Why is deflation bad?
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
What are the range of tools central banks have to carry out their monetary policy and control the money supply? (4 things)
- interest rates
- quantitative easing (QE)
- the reserve requirement
- the exchange rate
How many central banks are there in a country, and how many commercial banks are there?
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.
What a 2 roles of the central bank? (In detail)
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
What are the 2 roles of the central bank?
- The central bank is the supreme body of the country’s banking system
- a bank to commercial banks
How does the central bank act as the supreme body of the country’s Banking system?
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.
How does the central bank act as a bank to commercial banks?
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
What is the best known and most common method for controlling money supply?
Interest rates
