2.6.2 demand side policies

Question 1

define monetary policy?

Answer 1

changes to interest rates, the money supply and the exchange rate by the central bank in order to influence AD.

Question 2

what is the BOE’s main role?

Answer 2

to hit the inflation target at 2%

Question 3

what is the role of the expansionary monetary policy?

Answer 3

these are policies to boost AD

Question 4

what types of expansionary policies are there?

Answer 4

1. increase inflation- raise demand pull inflation if it’s below the target rate
2. increase growth
3. reduce unemployment

Question 5

what is the role of contractionary monetary policy?

Answer 5

these are policies to decrease AD

Question 6

what types of contractionary policies are there?

Answer 6

1. increase inflation-raise demand pull inflation if it’s below the target
2. increase growth
3. reduce unemployment

Question 7

why is there an incentive to reduce inflation?

Answer 7

this is because if inflation is beyond the economy it will disinceitvise consumers and businesses which means a reduction in AD can reduce demand pull inflation

Question 8

for a contractionary policy- why is there an incentive to prevent assets/credit bubbles?

Answer 8

this is to prevent excessive growth oh house prices and the risk of continuous borrowing can have a major risk to the financial sector.

Question 9

contractionary policy-why is there an incentive reduce excess debt and promote saving?

Answer 9

the idea of balancing economic growth-let’s assume that the economy is in high debt so if the government imposes high interest rates it will actually reduce the incentive to take out the debt- and promoting saving when rates are too high

Question 10

contractionary policy- if AD is reduced what happens to the current account deficit?

Answer 10

when AD falls-growth falls-income falls- there will be less spending on imports

Question 11

the major component is interest rates what impact does this have on expansionary monetary policy-important

Answer 11

they cut through transmission mechanism hitting the real economy

• lead to lower credit card so lower borrowing costs-cheaper for consumers so MPC increases on cars,jewelry etc.
• consumption will rise
• savings interest rates will fall so the rate of return saving falls which reduces the incentive to save therefore a rise in consumption
• also mortgages payments will come down this leads to consumer retaining more of their disposable income
• it will lead to a boost in consumption