Monetary Policy

Question 1

Define monetary policy

Answer 1

The use of monetary instruments to try and achieve policy objectives

Question 2

Outline examples of monetary policy

Answer 2

• changing the base rate (to influence interest rates)
• manipulation of the money supply (quantitative easing)
• changing the exchange rate

Question 3

What is the UK central bank

Answer 3

The Bank of England

Question 4

Define a monetary policy objective

Answer 4

The target that the Bank of England aims to hit

Question 5

Define a monetary policy instrument

Answer 5

Tool/technique used to achieve the objective

Question 6

Outline the main monetary policy objective

Answer 6

Controlling inflation

Question 7

Hat is the CPI inflation target rate?

Answer 7

2%

Question 8

What is the monetary policy committee (MPC)?

Answer 8

• group of economics + governor of the BoE
• set the base rate monthly
• decide if other aspects of the monetary policy need changing

Question 9

Define liquidity

Answer 9

How easy it is to turn assets into cash without a loss in value

Question 10

Define the money supply

Answer 10

The stock of money in an economy

Question 11

What is contractionary monetary policy?

Answer 11

Increasing the bank rate to help reduce AD in the economy

Question 12

How do higher interest rates cause AD to shift left?

Answer 12

Reduced household consumption
- saving is encouraged (as there are higher rates of return)
- individuals have less DI (higher proportion of income is spent on loan repayments)
- asset prices may fall - reduced consumer confidence - wealth effect
Reduced business Investment
- higher borrowing costs make investments less profitable
Changes in trade
- exports become less competitive globally

Question 13

What does the size of the shift (of AD) depend on?

Answer 13

The size of the multiplier

Question 14

Define the wealth effect

Answer 14

The impact of the value of peoples assets on their spending habits and overall AD in the economy

When consumer feel wealthier, they are more likely to increase their borrowing and spending

Question 15

Define quantitative easing

Answer 15

The injection of liquidity into the economy to boost AD (creation of new money by buying bonds in the financial market)

Question 16

What happens during quantitative easing?

Answer 16

• BoE purchases assets e.g government bonds + bonds from financial institutions
• this provides them with more money
• this creates an increase in money circulating the economy
• AD goes up