Lesson 55 (revise) Flashcards
Who uses fiscal policy?
The government
Who uses monetary policy?
The Bank of England
What does monetary policy do?
Adjust AD
How is AD adjusted by the BOE?
Through changes in:
Interest rates
Money supply
Exchange rates
Credit available
What 2 things do interest rates impact?
Cost of borrowing
Reward for saving
How will an increase in money supply affect AD?
Will increase AD
as more people have more money to spend
How does the BOE increase money supply?
Quantitative Easing
Quantitative Easing?
When the BOE purchases assets (e.g. bonds) back from commercial banks
What does the BOE increasing money supply through quantitative easing lead to?
Increased money for commercial banks
Thus more lending
Increased borrowing and investment
Leads to higher economic growth
Expansionary Monetary Policy graph?
(Shows that as AD shifts right on a LRAS curve, inflation increases)
NA
Base rate of interest?
The rate at which commercial banks can borrow from the BofE
decided by the BofE
Expansionary Monetary Policy
Increase AD
e.g. by by reducing the base interest rate
which encourages borrowing and investment
leading to economic growth
Contractionary Monetary Policy
Aims to decrease AD e.g. by increasing interest rates
Leads to a fall in disposable income
Resulting to an decrease in the AD (shift left)
Multiplier effect further decreases AD
Monetary transmission mechanism
Process by which a change in interest rates
affects aggregate demand
and inflation
Disposable income is also called …
discretionary income
