Econs - 4.3

Question 1

money supply - definition

Answer 1

refers to the amount of money in the economy at a particular point in time

Question 2

monetary policy - definition

Answer 2

• use of interest rates, exchange rates and money supply to control macroeconomic objects and to affect the level of economic activity

Question 3

3 ways to control

Answer 3

1. interest rates
2. money supply
3. foreign exchange rates

Question 4

changes in interest rates

Answer 4

• increased (*used to fight inflation) : borrowing becomes expensive => people and business borrow less => increased savings => decreased spending and investment => slows economy => lowers inflation
• decreases (*used to boost growth / fight recession) : borrowing becomes cheaper => increased spending => more production => economic growth => lower unemployment

Question 5

changes in money supply

Answer 5

• increases : more money available => increased borrowing => increased spending => can increase inflation
• decreases : harder to borrow => decreased spending => stops inflation & growth
  *used to control overall demand & inflation

Question 6

changes in exchange rate

Answer 6

• increases : currency becomes stronger => imports cheaper, exports more expensive => foreigners buy less of you goods => exports fall => reduces inflation
• decreases : currency becomes weaker => exports cheaper, imports more expensive => foreign buy more of your goods => exports increase => low unemployment & economic growth BUT imported goods are expensive

Question 7

expansionary monetary policy - goal

Answer 7

• increase spending, investment and employment
• used during recessions / slow growth period

Question 8

expansionary monetary policy - actions

Answer 8

• lower interest rates => cheaper loans for consumers & businesses
• increase money supply => banks lend more easily
• reduce exchange rate => exports become cheaper abroad

Question 9

expansionary monetary policy - process

Answer 9

low interest rates => increased borrowing => firms invest more => spending and production rises => more jobs created (low unemployment) => incomes rise => economy starts to grow

Question 10

contractionary monetary policy - goal

Answer 10

• reduce inflation & stop the economy from over heating
• used in a boom / high inflation period

Question 11

contractionary monetary policy - actions

Answer 11

• raise interest rates => loans become more expensive
• reduce money supply => banks lend less
• increase exchange rate => import cheaper, exports more expensive

Question 12

contractionary monetary policy - process

Answer 12

• higher interest rates => borrow less & save more => spending decreases => less presure on prices => inflation slows down

Question 13

effects of monetary policy on government macroeconomic aims

Answer 13

1. economic growth - decrease interest rates => increase spending => more output
2. low inflation (price stability) - increase interest rates / decrease money supply => decrease spending
3. employment - decrease interest => firms higher more
4. BOP - controls trade & inflation
5. redistribution of income - depends on interest rates (savers & borrowers will gain differently