4.4 - Monetary Policy

Question 1

What are the functions of expansionary monetary policy?

Answer 1

Falling real + nominal IR
Expand credit supply
Depreciate ER

Question 2

What is deflationary monetary policy?

Answer 2

Higher IR
Tight credit supply
Appreciate ER

Question 3

What does tightening of the credit supply involve?

Answer 3

Reduce access to credit
Harder to get loans

Question 4

What are the arguments for maintaining low interest rates?

Answer 4

Stimulate capital investment
Support AD + growth
Low inflation

Question 5

What are the counter arguments to low interest rates?

Answer 5

Return on savings - Effective income
Control credit demand + inflation
Policy leeway
House price inflation

Question 6

How does raising the interest rate benefit the housing market?

Answer 6

Increasing mortgage rates
Slowdown in house price inflation
Property affordability

Question 7

How do high rates provide policy leeway?

Answer 7

Central bank has ability to cut rates in case of external shock

Question 8

Describe the transmission mechanism for monetary policy

Answer 8

Change in market IR
Influences demand
Influences output, jobs, investment
Real GDP + price level affected

Question 9

How do lower rates affect the exchange rate?

Answer 9

Dissuades foreign investors
Harms demand + value
ER depreciates
Benefits exports

Question 10

What are the risks of raising interest rates?

Answer 10

Chokes investment
Appreciates ER
Larger current account deficit
Govt debt interest