MACRO - Monetary Policy

Question 1

What does monetary policy refer to?

Answer 1

The actions taken by a central bank to control the money supply, interest rates, and inflation to achieve macroeconomic stability.

Question 2

What are the two primary types of monetary policy?

Answer 2

• Expansionary monetary policy
• Contractionary monetary policy

Question 3

What is the goal of expansionary monetary policy?

Answer 3

To stimulate economic growth.

Question 4

What is the goal of contractionary monetary policy?

Answer 4

To curb inflation.

Question 5

What is interest rate manipulation in the context of monetary policy?

Answer 5

Adjusting the policy rate to influence borrowing and lending.

Question 6

What effect do lower interest rates have on the economy?

Answer 6

They encourage borrowing and investment.

Question 7

What are open market operations (OMO)?

Answer 7

Buying and selling government securities to regulate liquidity in the banking system.

Question 8

What happens when a central bank purchases bonds?

Answer 8

It injects money into the economy.

Question 9

What is the purpose of setting reserve requirements?

Answer 9

To determine the minimum reserves banks must hold, affecting their ability to lend.

Question 10

What is forward guidance in monetary policy?

Answer 10

Communicating future policy intentions to shape market expectations.

Question 11

What is the transmission mechanism in monetary policy?

Answer 11

The speed at which policy changes affect inflation and output.

Question 12

True or False: Some prices are less responsive to monetary policy.

Answer 12

True.

Question 13

What effect does price stickiness have on monetary policy?

Answer 13

Prices adjust more frequently in high inflation periods, making monetary policy more effective.

Question 14

What is a liquidity trap?

Answer 14

A situation where interest rates are near zero, causing monetary policy to lose effectiveness.

Question 15

What can weaken the effects of domestic monetary policy?

Answer 15

• Exchange rates
• Commodity prices
• Geopolitical events

Question 16

What is one upside of monetary policy?

Answer 16

• Flexibility
• Inflation control
• Stimulates growth
• Market confidence

Question 17

What does flexibility in monetary policy allow?

Answer 17

It can be adjusted frequently to respond to economic conditions.

Question 18

What is a downside of monetary policy related to time?

Answer 18

Effects take months or years to materialize.

Question 19

What are distributional effects in monetary policy?

Answer 19

Interest rate changes disproportionately affect borrowers and savers.

Question 20

What is a limitation of monetary policy during liquidity traps?

Answer 20

Near-zero interest rates reduce effectiveness.

Question 21

What risk is associated with excessively low interest rates?

Answer 21

Potential for asset bubbles.

Question 22

Monetary policy is a crucial tool for what?

Answer 22

Macroeconomic stability.

Question 23

What factors influence the effectiveness of monetary policy?

Answer 23

• Economic conditions
• Price flexibility
• External shocks

Question 24

What is monetary policy used for?

Answer 24

To control the money flow of the economy

Monetary policy is implemented through various tools like interest rates and quantitative easing.

Question 25

Who conducts monetary policy in the UK?

Answer 25

The Bank of England ## Footnote The Bank of England became independent from the government in the 1990s.

Question 26

What are the main tools of monetary policy?

Answer 26

* Interest rates * The supply of money/credit * The exchange rate

Question 27

What is the role of the Monetary Policy Committee (MPC) in the UK?

Answer 27

To alter interest rates to control the supply of money ## Footnote The MPC consists of 9 members who meet 8 times a year.

Question 28

What is the target inflation rate set by the government?

Answer 28

2% ## Footnote The MPC adjusts interest rates to help meet this target.

Question 29

What is the base rate?

Answer 29

The interest rate set by central banks for lending to other banks ## Footnote It serves as a benchmark for commercial banks' interest rates.

Question 30

What are the functions of a central bank?

Answer 30

* Manages currency, money supply, and interest rates * Issues physical cash securely * Regulates bank lending

Question 31

What services does the central bank provide to the government?

Answer 31

* Collects payments * Makes payments on behalf of the government * Maintains deposit accounts * Manages public debt

Question 32

What does it mean for a bank to be a 'lender of last resort'?

Answer 32

It provides liquidity to banks in crisis or risk of collapse ## Footnote This helps prevent panic withdrawals by depositors.

Question 33

True or False: Low interest rates increase the opportunity cost of saving.

Answer 33

False ## Footnote Low interest rates reduce the opportunity cost of saving, making borrowing cheaper.

Question 34

What impact do low interest rates have on consumer spending?

Answer 34

They increase disposable income and marginal propensity to consume ## Footnote Lower repayments on variable rate mortgages boost spending.

Question 35

What is the positive wealth effect?

Answer 35

When increased house prices lead to higher consumer spending ## Footnote This occurs as people feel richer and spend more.

Question 36

How do low interest rates affect investment?

Answer 36

They make borrowing cheaper for firms, encouraging investment in R&D ## Footnote Investment also increases with higher consumer spending.

Question 37

What is the impact of low interest rates on government spending?

Answer 37

Lower debt repayments encourage the government to issue more bonds ## Footnote This contributes to higher levels of government spending.

Question 38

What is 'hot money'?

Answer 38

Money that flows from countries seeking the highest interest rates ## Footnote Low interest rates may reduce hot money flow into an economy.

Question 39

What is Quantitative Easing (QE)?

Answer 39

A monetary policy used to stimulate the economy when interest rates cannot be lowered further ## Footnote It involves the central bank creating money to buy government and bank bonds.

Question 40

What happens when the Bank of England buys government bonds?

Answer 40

It provides the government with funds to spend in the economy ## Footnote This can include spending on training and education.

Question 41

What is a limitation of Quantitative Easing?

Answer 41

* Depreciation of currency * Lower attractiveness of bonds to investors

Question 42

What is the Funding for Lending Scheme?

Answer 42

A government initiative to lower funding costs for banks and building societies ## Footnote It aims to provide cheap funding to support banks.

Question 43

What is forward guidance?

Answer 43

A communication tool used by central banks to inform the public about future monetary policy ## Footnote It aims to reduce market uncertainty.

Question 44

What factors does the MPC consider when setting the bank rate?

Answer 44

* Unemployment rate * Savings rate * Consumer spending * High commodity prices * Exchange rate

Question 45

What effect does a high unemployment rate have on interest rates?

Answer 45

It suggests the MPC will drop interest rates to encourage spending.

Question 46

How do high commodity prices influence monetary policy?

Answer 46

They may lead the MPC to increase interest rates to combat cost-push inflation.

Question 47

What happens to exports when the exchange rate weakens?

Answer 47

UK exports become relatively cheaper, increasing their demand.