3) Monetary Policy (3) QE and Other tools - MMT Flashcards

1
Q

By manipulating interest rates what does this do?

A

The Bank of England aim to control the supply of money, either increasing it (expansionary monetary policy) or decreasing it (Contractionary monetary policy)

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2
Q

What does monetary policy hope to effect?

A

The level of AD and the price level

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3
Q

Why does the Bank of England not literally print more money or less money (contractionary monetary policy)?

A
  • It is very outdated, cash is now such a small pay of overall spending, by 2022 cash was only used for 10% of the value of all payments in the UK
  • the reputation of extra bank notes to solve economic problems never really recovered from its disastrous use by the German government in 1922/23, when it created hyperinflation, ultimately leading to the Nazi’s gaining power in Germany
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4
Q

Why is there hyperinflation?

A

Too much money chasing too few goods

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5
Q

What is the most important alternative to bank rate changes?

A

The policy of Quantitative Easing

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6
Q

Is Quantitative Easing Expansionary or Contractionary?

A

Expansionary

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7
Q

When was it widely used?

A

To counter the threat of deflation from 2010-2015

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8
Q

What does QE involve the Bank of England doing?

A

Creating money digitally, brand new money that had not previously existed, by just (figuratively) pressing a button!

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9
Q

What is the extra money in quantitative easing used for?

A

The extra money is then used to buy government bonds from a wide range of financial institutions but particularly banks, doing this injected cash into the banking system

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10
Q

What is the hype with this new injected cash into the banking system?

A

The hope is that this cash can be used by banks as a basis for creating new loans to different economic agents

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11
Q

What is the hope of the result of QE?

A

Bank of England hope to increase AD in the economy and get the price level higher, if the target inflation rate is low, QE might be effective in raising it

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12
Q

What is another intentional consequence of QE other than countering inflation?

A

It lowers interest rates

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13
Q

What are interest rates basically?

A

Interest rates (r) is basically the price you pay to borrow money

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14
Q

What are interest rates determined by?

A

Demand and supply of money

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15
Q

In the interest rate diagram, what do we assume is independent?

A

Money supply is actually independent of interest rates as money supply is determined by the Bank of England

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16
Q

How does the Demand for money look on the interest rates diagram?

A

Demand for money comes from the economic agents; like all D curves this slopes downwards, implying that the economic agents demand more money at lower rates of interest

17
Q

Why is the money supply (MS) curve inelastic?

A

The supply of money is fixed by the Bank of England: therefore the MS curve is perfectly inelastic, fixed at Q1,Q2 or whatever

18
Q

How is QE displayed on the interest rates diagram?

A

That if the Bank of England use QE to increase the money supply, MS shifts to the right from MS1 to MS2 meaning the equilibrium interest rate will fall

19
Q

How did QE unintentionally increase inequality?

A

A consequence from the widespread use of QE by central banks in the 2010’s, it caused a large surge in the value of assets other than money. This is because the return from saving money was poor at low interest rates whilst the cost of other assets was also lower than before, due to low interest rates. This increase in asset prices greatly benefited those on high incomes, exacerbating income and wealth inequalities

20
Q

What are the other tools that the Bank of England is in Monetary Policy? (3 ways)

A

1) Change the inflation target
2) Change the reserve ratio
3) Manipulate the exchange rate

21
Q

What is an example of changing the inflation target?

A

If inflation is too low they could increase the target from 2% to 3%

22
Q

How would inflation targeting effect the economy?

A

This would change inflationary expectations in the economy

23
Q

What would happen if the Bank of England increased the inflation target?

A

This would change inflationary expectations, workers would claim higher wage deals which in turn would drive up prices

24
Q

If inflation was too high, how would the Bank of England change the inflation target?

A

They would lower the target rate

25
Q

Who sets the reserve ratio?

A

The reserve ratio is a regulation set by a central bank which commercial banks have to follow

26
Q

What does the reserve ratio mean?

A

It is a regulation set by a central bank which commercial banks have to follow, it requires them to keep a certain % of their deposits in cash

27
Q

If the reserve was set to 1% by the Bank of England, what does this mean?

A

Then every commercial bank would need to keep 1% of the value of their deposits in cash

28
Q

What does raising the reserve ratio to 2% mean?

A

Would mean that banks need to keep more cash meaning they can give out less in new loans; lowering (or abolishing) the ratio would increase the ability of banks to create new money

29
Q

How does the central bank manipulate the exchange rate?

A

This is especially important where a country has a fixed exchange rate, the central bank buys and sells its own currency on the open market with the objective of sustaining the level they want

30
Q

How would central banks manipulate the exchange rate if it is being forced downwards?

A

They increase demand for their own currency by buying it (using their reserves of foreign currency)

31
Q

How would central banks manipulate the exchange rate if it is under upward pressure?

A

They increase supply of their own currency by demanding more foreign reserves. The People’s Bank of China use this approach to manage the value of the Yuan