Lesson 32-Monetary policy

Question 1

Define the monetary policy

Answer 1

This involves the manipulation of interest rates and the money supply by the govt in order to achieve the macroeconomic objectives by influencing the level of AD

Question 2

Define interest rates

Answer 2

This refers to the cost of borrowing and the reward for savings

Question 3

Define and explain the expansionary monetary policy

Answer 3

This refers to a situation when the gvt increases the level of AD in the economy by reducing interest rates in order to achieve economic growth or reduce unemployment

Question 4

Define and explain contractionary monetary policy

Answer 4

This refers to a situation when the gvt reduces the level of AD in the economy by raising interest rates in order to reduce a deficit in the BOP or reduce inflation.

Question 5

Explain the concept of quantitative easing

Answer 5

This refers to when central banks purchase govt bonds from commercial banks hence commercial banks will have more money to lend leading to a rise in money supply this reducing interest rates which will increase the amount of money borrowed by people consequently rising AD thus achieving economic growth.