2.3 unemployment (solution - monetary policy)

Question 1

what is the monetary policy

Answer 1

involves managing the money supply and interest rates in order to achieve specific economic objectives and control the economy

Question 2

what are the 4 key aspects of the monetary policy

Answer 2

1) interest rates
2) money supply control
3) reserve requirements
4) quantitive easing

Question 3

explain aspect of interest rates (MP)

Answer 3

central banks influence the economy by setting benchmark interest rates, lowering them makes borrowing cheaper which encourages spending and investment while raising them can help control inflation by discouraging borrowing

Question 4

explain aspect of money supply control (MP)

Answer 4

central banks manage the amount of money circulating in the economy through tools like open market operations where they buy or sell government securities to increase or decrease liquidity

Question 5

explain aspect of reserve requirements (MP)

Answer 5

central banks may set reserve requirements for commercial banks, determining how much capital they must hold in reserve, adjusting these requirements affects banks lending capacity

Question 6

explain the aspect of quantitative easing (MP)

Answer 6

in times of economic crisis central banks may engage in QE purchasing financial assets to inject liquidity into the economy and encourage lending and investment

Question 7

what are the objectives of the monetary policy

Answer 7

maintain price stability by control inflation levels

promote economic growth by influencing investment and consumption

reduce unemployment by stimulating economic activity

maintain the stability of the national currency, preventing excessive fluctuations in exchange rates that can impact trade and investment

Question 8

what are the two types of monetary policy

Answer 8

expansionary
contractionary

Question 9

what is expansionary monetary policy

Answer 9

aimed at stimulating economic growth during a recession by increasing the money supply and lowering interest rates

Question 10

what is contractionary monetary policy

Answer 10

aimed at reducing inflation by decreasing the money supplying raising interest rates when the economy is overheating

Question 11

advantages of monetary policy

Answer 11

helps manage inflation

central banks can quickly implement change

can reduce unemployment
-not political as the Bank of England is neutral

Question 12

disadvantages of monetary policy

Answer 12

can be significant delays between the implementation of the policy and its effects

can lead to excessive inflation if policy is too expansionary

changes in IR can disproportionately effect different income groups potentially widening income inequality

may be ineffective if the animal spirits of firms and comsumers are low