Monetary Policy

Question 1

Liquidity trap (amount of money in circulation)

Answer 1

Situation in which conventional monetary policy begins to lose traction

In spite of low Intrest rates

Economic agents prefer to save than spend

Usually due to low business/consumer confidence

Question 3

Liquidity trap explanations

Answer 3

As rates approach 0 difficult to cut them futher

If rates below long-run averages people expect them to rise in the future (problem because policy doesn’t stimulate AD)

During a recession bussines/consumer confidence is too low for people to spend/take on debt

Effectively making demand for loans inelastic

Question 5

Paradox shift

Answer 5

Increase in savings reduces AD and thus RNO and income

(Spending goes down , demand for labour also goes down , incomes go down , savings go down)

Question 6

Real and nominal Intrest rates

Answer 6

When bank offers savers 5% on deposits this is nominal Intrest rates

At the end of year tfrom £100 deposited they’ll have £105

However real value of savings has not increased by 5% if there has not been inflation

(Increase in inflation reduces spending power of savings )