Monetary Policy

Question 1

What is monetary policy?

Answer 1

Policy’s that influence AD through the money supply. Primarily the interest rates

Question 2

What is a floating exchange rate?

Answer 2

The exchange rate is determined by market forces and not the central banks or Gov

Question 3

If interest rate increase, what happens to the exchange rate?

Answer 3

•It increase because there higher demand for the British pound
(This is called Hot money)

Question 4

What are the roles of central banks and what are they?

Answer 4

• They’re public owned banks that operate to help the government meet their macroeconomic objectives.
• They lend commercial and investment banks money as a last resort.

•NOT A PROFIT MAXIMISING BUSINESS

Question 5

What are central banks responsible for ?

Answer 5

• Controlling the exchange rate
• Set the base rate of interest.
• Regulate commercial banks and ensure they’re ethical and responsible.
• Run the monetary policy committee.

Question 6

Define base rates of interest

Answer 6

The rate that central banks charge commercial banks and discounts houses

Question 7

What is the monetary committee?

Answer 7

A committee of the central bank that meet 8 times a year to decide the official interest rates.

Question 8

What is quantitative easing?

Answer 8

•When central banks print or create money and buy assets from commercial banks using this money.

Question 9

What does quantitative easing do?

Answer 9

•Increases the amount of money in circulation which will reduce interest rates.

Question 10

When is quantitive easing used?

Why?

Answer 10

• ONLY IN EXTREME MEASURES.

* Can lead to inflation and hyper inflation.