Monetary Policy Flashcards
Who said it may be necessary to implement quantitative easing in 2013?
George Osborne
What’s the main objective of the monetary policy
To control inflation
List two objectives of quantitative easing
1)Support aggressive demand and avoid risk of recession
2) Increase the bank money supply
Arguments for Quantitative easing
1) It can help when interest rates are of low effect due to external shocks that cause low animal spirits such as the 2007/08 financial crisis
2) It can also help avoid a liquidity trap
3) It avoids against deflation as it can boost the money supply, cutting long term intrest rates by 1% Lower Mortgage better loan deals
What’s a liquidity trap
When low nominal interest rates have low effects on AD due to low animal spirits from consumers and business’.
Who talks about a liquidity trap
Keynesians
What does cheaper mortgages depend on
The price of the mortgage and how attainable they are
Arguments against Quantitative easing
1) It has led to widening income inequality in the UK
2) Has only helped prop up the stock market which only benefit owners of assets, people in higher income groups
What did the standard poor report tell us in 2016?
It suggested that the value of financial assets have risen by £600Bn whilst average real wages fell by 8%
Evaluation of negatives of QE
However, without QE we could see GDP fall due to worsening deflation
What does the transmission mechanism show
It shows the time lags in increasing or decreasing the bank rate/interest rate
Explain the mechanism a low bank rate imposes
1) Cheaper to borrow
2) Cheaper Mortgage
3) Greater speculation (better animal spirits)
4)A depreciating exchange rate
What does a weaker exchange rate bring (WPIDEC)
Imports are more expensive so companies that import raw materials essentially are experiencing higher costs and thus will lead to cost-push inflation to occur and be pushed into consumers.
What will happen to total demand?
Domestic demand will fall due to a weaker pound causing cost-push inflation which will cause total demand to fall as it creates overall inflation pressure.
What is total demand
Total demand = ( External demand + Domestic demand)
