Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economics- Macro > Monetary Policy > Flashcards

Monetary Policy Flashcards

1
Q

definition of monetary policy

A

monetary policy involves changes in interest rates, the supply of money & credit and exchange rates to influence the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Points of expansionary monetary policy (increasing AD)

A
  • fall in nominal and real interest rates
  • measures to expand supply of credit
  • depreciation of the exchange rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Points of deflationary monetary policy (decreasing AD)

A
  • higher interest rates on loans and savings
  • tightening of credit supply (loans harder to get)
  • appreciation of the exchange rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

describe the transmission mechanism

A

official bank rate: market rates
asset prices - domestic demand
expectations/confidence- external demand
exchange rate -import prices

-total demand- domestic inflationary pressure
: domestic inflationary pressure + import prices -inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what does the transmission mechanism show?

A

the effect of interest-rate changes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

3 LCR for rising interest rates leading to falling inflationary pressure: saving, borrowing, mortgages

A

IR rise- more expensive to borrow- less incentive to borrow- falling consumer spending- falling AD- falling inflationary pressure
IR rise- more reward for saving- greater incentive to save- falling consumer spending- falling AD- falling inflationary pressure
IR rise- rates rise on variable rate mortgages- falling consumer spending- falling AD- falling inflationary pressure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what is the main monetary policy objective?

A

controlling inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

definition of interest rates?

A

an interest rate is the reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what is inflation rate targeting?

A

when the MPC of the bank of England sets interest rates in order to meet the inflation target set by government (2%)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

different types of interest rates:

A
  • interest rates on savings in bank and other accounts
    -borrowing interest rates
    -mortgage interest rates (housing loans)
    - credit card interest rates and pay-day loans
    - interest rates on government and corporate
    loans
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what is the real rate of return on savings?

A

money rate of interest minus the rate of inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

when do real interest rates become negative?

A

when the nominal rate of interest is less than inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

price deflation can lead to what?

A

an increase in real interest rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

likely effects of an increase in interest rates: (a decrease will have the opposite effect)

A
  • less borrowing
  • less consumer spending
  • less investment by firms
  • less confidence among consumers and firms
  • more saving
  • a decrease in exports
  • a increase in imports
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

a reduction in interest rates or an increase in the supply of money and credit is a what type of monetary policy?

A

expansionary monetary policy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what is expansionary monetary policy?

A

uses lower interest rates to increase aggregate demand and shift the AD curve to the right. designed to boost consumer confidence and demand during a downturn/recession

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

how a increase in interest rates decreases aggregate demand?

A

-higher interest rates reduce household consumption:
-ppl save, less income available for C
-cost of borrowing increases, increases of credit
card debt, less money to spend on C
-high IR, asset prices fall, reduce personal wealth,
reduces C
-falling house and share prices reduce consumer
confidence, deflates C
-higher interest rates reduce business investment
-higher borrowing costs make buying capital
goods unprofitable
-changes in interest rates affect exports and imports via exchange rate
-higher interest rate increases demand for
pounds, causes pounds exchange rate to rise,
UK exports less price competitive in world
markets and imports more competitive in UK
markets, UK BOP on current account worsens

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

impact of lower interest rates- demand side and draw diagram

A

-slow economic growth feed through to lower inflation may cut interest rates
-reduces savings ratio and makes borrowing more attractive so C rises
-increases real national output from Y to Y1
LRAS curve AD shifts to the right up curve from AD to AD1: creates employment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

impact of lower interest rates- supply side and draw diagram

A

-may stimulate businesses investment into capital process to improve their productivity and efficiency: shift LRAS to LRAS1
-investment is a component of AD so AD shifts to AD1
-productive capacity increased to FE1 and increase in AD feed through to higher growth and employment
LRAS shifts to the right to LRAS1, AS moves up curve to right to AD1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

what happens when people are pessimistic about future of the economy and prefer to hold onto their money and unlikely to borrow any more? what will lowering interest rates do and whats this an example of?

A

lowering interest rates wont have an effect and monetary policy will become ineffective. this is an example to liquidity trap

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

impact of higher interest rates LCR:

A
  • raises interest rates
  • tighter monetary policy
  • market interest rates increase
  • cost of borrowing rises
  • main effect through mortgages
  • possible slowdown in housing market
  • contraction in retail credit
  • higher rates might also cause currency appreciation
  • makes UK exports more expensive in overseas market
  • lower demand
  • domestic inflation
  • inflation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

what is the bank rate?

A

the lowest rate at which the bank of England will lend to financial institutions. (ISNT rate of interest pay for mortgage or bank loan but they are linked)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

if the bank rate goes up what does this usually lead to? (opposite for bank rates fall)

A

interest rates on mortgages and bank loans also increasing

24
Q

what does hot money refer to, use an example?

A

when interest rates are high in UK, big financial institutions want to buy the pound. so can put money in uk banks and take advantage of high rewards for savers brought about by high IR- short-term movement of money

25
Q

what does an increase in demand for the pound mean?

A

its price will go up

26
Q

what does a high exchange rate make UK exports? and what happens to exports and bop?

A

exports more expensive. exports go down, worsening the current account on the BOP

27
Q

what does high interest rates mean for imports and current account? what happens to ad?

A

high IR mean imports from abroad are cheaper and worsens current account. imports are a leakage in circular flow of income, more spending on imports means a reduction in AD

28
Q

what happens when UK interest rates fall? (exchange rate)

A

exchange rate of pound falls
UK exports increase (Uk goods get cheaper)
imports decrease (foreign goods get expensive)
balance of payments improves

29
Q

definition of exchange rate?

A

rate at which one currency trades against another on the foreign exchange market. the purchasing power of one currency against another

30
Q

when does liquidity trap occur?

A

when low interest rates and a high amount of cash balances in the economy fail to stimulate aggregate demand

31
Q

reasons for liquidity trap:

A
  • risk averse commercial banks: required to hold more capital, risk premium on new loans
  • private sector businesses and consumers: low on confidence, focused on cutting debt
32
Q

monetary policy evaluation:

A
  • time lags should be considered when analysing effects of interest rate changes
  • not an exact science- businesses and consumers don’t always behave in standard way
  • does not work in isolation
  • objectives can change
  • many factors affect costs and prices which can change inflation risks in a country
33
Q

what is contractionary monetary policy?

A

uses higher interest rates to decrease aggregate demand and to shift the AD curve to the left (SRAS)

34
Q

what is quantitive easing?

A

an expansionary monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to stimulate the economy and increase liquidity

35
Q

when is quantitative easing used?

A

when its necessary to adopt a ‘loose’ monetary policy to stimulate aggregate demand (or create upward pressure on inflation) at a time when interest rates are already very low

36
Q

what does QE increase?

A

increase the money supply which will enable individuals and firms to spend more

37
Q

using QE to bring up the rate of inflation has the benefit of what?

A

it keeps a currency weak which can increase the competitiveness of an economy and boost exports

38
Q

QE provides a boost to what?

A

overall confidence in an economy as consumers and firms see the central bank taking action

39
Q

One danger of using QE:

A

financial institutions may initially use this new money to increase their reserves, and only lend it out when the economy improves. this extra lending at a time when inflation may be increasing can lead to demand-pull inflation becoming harder to control

40
Q

what is helicopter money?

A

a form of monetary policy in which a central bank prints money and distributes it directly to households/consumers

41
Q

what is the purpose of helicopter money?

A
  • increase money supply
  • target higher inflation
  • increase aggregate demand in the economy when conventional monetary policy has failed
42
Q

difference between QE and helicopter money?

A
  • helicopter money goes directly to households and consumers rather than banks and financial institutions who sell bonds to the central bank
  • helicopter money is non-reversible
43
Q

disadvantages to helicopter money?

A
  • inflation could increase more than expected

- central bank could loose inflation creditability

44
Q

advantages to helicopter money?

A
  • greater impact on boosting spending and aggregate demand than QE
  • can target higher inflation which helps to avoid problems related to deflation and debt deflation
  • better distribution
45
Q

ways to manipulate exchange rate:

A
  • buying or selling currencies on the foreign exchange market
  • through interest rates, which affect demand and supply of sterling via their effect on inflows of hot money
  • some currencies are subject to exchange controls by the relevant national central bank
46
Q

describe a free-floating currency:

A
  • value of a currency is determined by purely demand and supply of the currency
  • most currency dealing is speculative but trade and investment decisions have a role to play
47
Q

describe a fixed exchange rate system:

A
  • the exchange rate is pegged and there are no fluctuations from the central rate
  • a country can automatically reduce its competitiveness by reducing its costs below that of other countries
48
Q

describe and define a managed-floating currency

A

when the central bank may choose to intervene in the foreign exchange markets to affect the value of a currency to meet specific macroeconomic objectives

  • value of currency is determined by market demand for and supply of the currency
  • big fluctuations in the external value of a currency can increase investor risk and perhaps damage business confidence
49
Q

factors affecting exchange rate:

A

-interest rate differentials
-trade balances:
-recession in trading partner-causes fall in export
sales- worsening of trade balance- inward shift of
currency demand- currency will depreciate
-economic growth
-inflation
-confidence in the economy/currency
-foreign direct investment
-portfolio investment

50
Q

impact of depreciation: on improved balance on current account following a depreciation if demand for import and export are price elastic

A

import:
price-rise
sales volume-fall fall
sales value- fall

export:
price-fall
sales volume- rise rise
sales value-rise

51
Q

impact of depreciation: on worsened balance on current account following a depreciation if demand for import and export are price inelastic

A

import:
price-rise rise
sales volume-fall
sales value- rise

export:
price-fall fall
sales volume- rise
sales value- fall

52
Q

impact of appreciation: on worsened balance on current account following an appreciation if demand for import and export are price elastic

A

import:
price-fall
sales volume- rise rise
sales value- rise

export:
price-rise
sales volume- fall fall
sales value- fall

53
Q

impact of appreciation: on improved balance on current account following an appreciation if demand for import and export are price inelastic

A

import:
price-fall fall
sales volume- rise
sales value- fall

export:
price-rise rise
sales volume- fall
sales value- rise

54
Q

a currency appreciation makes exports what?

A

more expensive and likely to lead to an inward shift of AD

55
Q

a currency appreciation makes imports what?

A

cheaper and likely to cause an outward shift of AS

Economics- Macro (21 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions