Monetary Policy

Question 1

What does monetary policies involve?

Answer 1

the change of interest rates and manipulation of money supply by the monetary authorities

Question 2

Who/What are the monetary authorities?

Answer 2

in the UK the monetary policy is managed by the Bank of England the monetary policy committee (MPC)

Question 3

What are the aims of the monetary policy?

Answer 3

control inflation

maintain sustainable economic growth

control exchange rates (not as important)

Question 4

What is the aim for inflation?

Answer 4

2%

Question 5

What do the MPC do?

Answer 5

they meet every month to determine interest rates

Question 6

What would the monetary policy committee do if inflation may go over the target?

Answer 6

they would increase interest rates which would encourage saving and decrease spending and borrowing and therefore decreasing demand which then helps decrease inflation

Question 7

What the monetary policy committee do inflation might fall below target?

Answer 7

they would increase interest rates to boost economic growth and decrease unemployment

Question 8

What are 4 effects of higher interest rates?

Answer 8

1. makes borrowing more expensive
2. firms are less willing to invest by borrowing money
3. the cost of morgases increases leaving people with less disposable income
4. saving looks more attractive due to an increased reward

Question 9

What are two drawbacks of the monetary policy?

Answer 9

if consumer confidence is high raising interest rates will have little change on spending habits

monetary policy can have up to 18 months time lag if people have for example if people have fixed mortgages they won’t see the effects for a while

Question 10

What are 3 effects of lower income rates?

Answer 10

1. reduced incentive to save
2. lower borrowing costs
3. lower mortgage interest payments