12.3 Central Banks And Monetary Policy Flashcards
(47 cards)
What is a central bank?
A national bank that provides financial and banking services for a country’s gov and banking system as well as implementing the govs monetary policy and issuing currency
What are the two key functions of a central bank?
Help gov maintain macroeconomic stability
Bring about financial stability in the monetary system
What is the govs inflation targer
2%
How can price stability be achieved
Through the bank acting as a lender of last resort to the banking system +the central bank monitoring and regulating the financial system
What is the lender of last resort .
The readiness of the central bank to extend loans to banks that are solvent but have short term-liquidity problems-stops a crisis in the financial system
What is a kit function of the Bank of England
Function of implementing monetary policy on behalf of the gov
What is monetary policy ?
Part of economic policy that attempts to achieve the govs macro objectives using monetary instruments such as controls over bank lending and the rate of interest
What is a policy objective
Target the Bank of England aims to hit
What is a policy instrument
Is the tool of control used to try achieve the objective
What can policy objectives be divided into?
Ultimate and intermediate objectives
What do policy objectives split people into?
Seperwte those that directly affect the supply or Jew deposits that the commercial banks can create those that influence the creation of bank deposits by affecting the demand of loans and credit
What is the monetary policy Committe
Part of the Bank of England which Implements UK monetary policy
Gov sets monetary policy targete which the MPC try and achieve
What are monetary policy instruments?
The tools used to achieve the objectives of monetary policy
Bank of England taking action to influence interest rates supply of Koenig and credit and the exchange rate
What is the bank rate
The rate of interest the Bank of England pays to commercial banks on their deposits held in the Bank of England
What does monetary policy actually do?
Used to manage the level of AD in the economy
How does fiscal policy affect AD
Changes gov spending
How does monetary policy change AD?
Changes G, C,I and X-m
What are the factors considered by the monetary policy committee when setting bank rate?
+
-current rate of inflation
-existence of inflationary or deflationary pressure
-consumer and business confidence
-economy’s growth rate
Levels of unemployment and employment
When happens if inflation is 1% above or below target
Bank of England must write a letter to the chancellor explaining what happened
What is contractionary monetary policy?
Uses higher inters rates to decrease AD and shift the AD curve to the left
Diagram for how increased interest rates shift AD to the left
What are the 3 main ways a increased interest rate decreases AD
-reduce household consumption (incentive to save)
-reduce business investment (higher borrowing costs)
-affects imports and exports
How does changes in interest rates affect imports and exports?
+interest rate: increases demand for pounds by attracting capital flows into the currency, causes the pounds exchange rate to rise makes pound less competitive internationally
-interest rate: triggers a capital outflow in the balance of payments. Increase of supply of pounds leads to a fall in exchange rates exports become more price competitive and the current account of the balance of payments improves. aD increases
What is expansionary monetary policy?
Uses lower intrest rates to increase AD
