monetary Flashcards
(15 cards)
what is monetary policy
government decisions based on interest rate and money supply and exchange rate
how does a change in the base rate affect commercial banks
the commercial banks mirror the change and pass it to their patrons
how does a change in a commercial banks interest rate affect patrons of the banks
the rate of interest is the cost of borrowing and the reward to saving. this grows or depletes along with the interest rate. this means consumers buy less/more, and firms invest less/more.
how does changing the base rate impact aggregate demand
it will lead to more/less consumer expenditure and investment, leading to a shift in AD
how does interest rate impact the exchange rate
the higher the interest rate, the higher the reward to foreigners who save in UK banks. to do this they must have pounds, increasing demand for pounds which increases the price of pounds, which is the exchange rate to foreign currency. the reverse is true.
how does changing the exchange rate (as a result if changes to the interest rate) impact ad
the exchange rate changing will make imports and exports more/less attractive to domestic eyes and foreign eyes. this changes net trade which shifts AD.
how does the UK central bank change the money supply
quantitive easing
what is quantitive easing
the central bank increasing the money supply and using electronically created fund to buy government bonds or other securities from financial insititutions.
when is quantitive easing typically used
when base interest rates cannot be cut any further
what is the aim of quantitive easing
to increase economic activity, via bank lending, consumer expenditure and investment.
raising inflation to avoid delayed spending and meet inflation target.
how does quantitive easing work
central bank created money electronically and uses it to buy bonds and securities from governments and banks. this increases the amount of cash that governments and banks have, meaning the government can spend more/borrow less and banks are more likely to lend money boosting C+I
how does quantitive easing impact the interest rate
the more supply of money there is, the lower the cost to borrow and the lower the reward to saving, meaning the interest rate falls.
what is the process of quantitive easing in order to decrease the exchange rate
the central bank uses its domestic currency reserves to buy a foreign currency, meaning there is mroe of its domestic currency in the global economy. this is done on the fired market. this increases the supply of domestic currency pushing down the exchange rate. this weakens the point causing ad to expand
evaluate the idea that increased money supply decreasing the exchange rate causes economic growth
costs of productions for firms rise as the cost of importing rises with a weaker pound. this shifts SRAS inwards causing economic decline.
what is the process of quantitive easing used in a boom to increase the exchange rate
the central bank uses its foreign currency reserves to buy domestic currency from other countries, reducing the supply of domestic country in the global economy, increasing the exchange rate. shifting ad in.
