Demand-side policies - [2.6.2] Flashcards
Monetary policy (18 cards)
What are 2 factors that influence the value and supply of money?
Value: Inflation and interests rates
Supply: Quantitative easing and interest rates
What is the purpose of bank notes?
Trust for face value promises its wealth
What gives money its value?
Promises of how much it is worth trust it is worth that
What is the value of money determined by?
The number on it also inflation and interest rates
What is the Bank of England’s role in managing value of money?
To print money, maintain its value
What is monetary policy?
Monetary policy involves changes in the interest rates, supply of money credit, and exchange rates to influence the economy.
What are the questions around monetary policy?
What interests are people paying to borrow money?
Is the currency increasing or decreasing against others?
Is there enough credit available for consumption and investment?
Are prices rising too quickly so that inflation targets are missed?
What is the role of the bank in the circular flow of income?
Allow exchange of money between the different components
What are the other roles of the bank?
Connect money with those who invest and need to borrow, risk in business
What are the risks in the financial system?
Withdrawing money at one time loosing trust in the banking systems
What do banks do to cover their risks?
Risks so spread many loans across different sectors.
People put money in the banks need liquid assets changed into monetary form
What is the interest rate?
Reward for saving and cost of borrowing as a % of money saved.
What are the type of interest rates?
Interest rates on savings in a bank and other accounts, Borrowing interest rates, Mortgages credit card interest, Interest on Government and corporate bonds.
What are the transmission mechanisms?
Changes in market interest > Bank of England changes base rates which impacts on interest rates for borrowing and saving
Impact on demand > AD shifts due to changes in spending, investment and exports
Effect on output jobs and investments > Multiplier impact on consumption and investment
Real GDP and price inflation > Output and prices will change depending on AS.
What are the types of monetary policy?
Expansionary - Fall in nominal and real interest rates measures to expand supply of credit.
Deflationary - Higher interest rates on loans and savings tightens of credit supply appreciation of interest rates.
What is Quantitative easing?
Quantitative easing is a process whereby the central bank purchase government bonds and private securities from banks.
Increases value of these financial assests and adds more money supply.
Quantitative tightening is the opposite Bank sell bonds back take money out of system.
What are the limits of monetary policy?
Banks are reluctant to lend meaning less return
Low confidence means consumption and investment is low negatively affecting AD.
Asset prices bubble due to low interest rates value of property’s increase negatively impacts buyers
Falling real incomes Negative impact on circular flow mortgages increase personal debts increase
Interest rates on credit cards have risen credit cards have flexible rates
What are the evaluations of monetary policy?
Liquidity trap - occurs when a cut in interest rates fails to stimulate economic activity like low confidence.
Cost push inflation - Higher IR reduces the impact of cost push inflation
Exchange rates - high interest rates can cause an appreciation in the exchange rate exports less competitive
Impact - interest rates many affect some parts of the economy more than other higher borrower rather than savers
Time lags - 12-18 months to effects to filter through economy.
