Monetary policy

Question 1

Define demand side policy

Answer 1

policy designed to affect aggregate demand - typically to shift it to the right

Question 2

Define fiscal policy

Answer 2

POlicy to affect aggregate demand by altering government expenditure and/pr taxation

Question 3

Define monetary policy

Answer 3

Policy to affect aggregate demand by altering the supply of money in the economy or manipulating the rate of interest

Question 4

What are the three methods to set up for setting monetary policy - who makes the policy and determines how to go about it

Answer 4

Method one:
Government can choose what to do (policy) and how to do it and the central bank just apply all of these measures
Method two:
Policies or what needs to be done is determined by government and central bank set measures.
Method 3:
Central bank has the discretion over the policy and the measures available.

Question 5

What is the primary objective of the ECBs monetary policy

Answer 5

The primary objective of the ECBs monetary policy is to maintain price stability. The ECB aims at inflation rates of below but close to, 2% over the medium term

Question 6

What are the determinants for demand for money

Answer 6

Money national income
Frequency at which people are paid 
Financial innovations
Speculation about future returns on assets
Rate of interest

Question 7

What are the two different types of money supply

Answer 7

exogenous (vertical line) or endogenous((determined by the interest rate aka demand)

Question 8

What causes an increase in money supply

Answer 8

Banks reduce liquidity ratio
Non-bank private sector chooses to hold less cash - Increases money in the financial system.
A public sector deficit - Funded by borrowing increase level of money in the economy
Inflow of funds from abroad

Question 9

What are four control mechanisms for operation of monetary policy

Answer 9

Open market operations
Funding
Adjusted central bank lending to banks
Variable minimum reserve ratios

Question 10

Explain Open market operations as a control mechanism for operation of monetary policy

Answer 10

Direct intervention by monetary authorities through purchase and sale of securities in the financial market.

Question 11

Explain Funding as a control mechanism for operation of monetary policy

Answer 11

Government funding. The extent to which government expenditure is funded by short term vs long term debt. If you adjust the model to more long term debt than short term debt you change the money supply

Question 12

Explain Adjusted central bank lending to banks as a control mechanism for operation of monetary policy

Answer 12

Changing how they directly loan to banks. To generate credit banks need to be able to borrow money cheaply. By making it more difficult for them to borrow money, the central bank reduces money supply.

Question 13

Explain Variable minimum reserve ratios as a control mechanism for operation of monetary policy

Answer 13

How much capital do the banks have to hold. By reducing reserve ratios you increase money supply in the market. By increasing it you reduce the supply of money

Question 14

What is the case for having rules in Implementing monetary policies

Answer 14

Help to reduce inflationary expectations - if rules are unambiguous and rigid. This reduces speculation
Create a stable environment for investment and economic growth

Question 15

What is the case for having no rules or discretion in implementing monetary policies

Answer 15

Problem of shocks
Rules can cause severe fluctuations in interest rates and greater instability - trying to hit targets with increases and decreases as per rules
Which rule to choose
Rules may conflict or become unsuitable

Question 16

Explain Goodhearts Law

Answer 16

Controlling a symptom of a problem will not cure the problem, instead the indicator will merely cease to be a good indicator to the problem

Question 17

Explain Taylors rule

Answer 17

Raise the interest rate is a) inflation is above target or b)economic growth is below the sustainable level. This is a metarule. Lots of different ways of looking at it.

Question 18

Controlling interest rates what three rates affect the rate commercial banks can charge if they are changed. Explain what each of these rate means

Answer 18

The interest rate on the main refinancing operations - central bank is directly responsible for this. This is when banks borrow from central banks
The rate on the deposit facility - Overnight deposits with the central banks
The rate on the marginal lending facility - short term lendings

Question 19

What are some non standard measures of of applying monetary policy

Answer 19

Bond buying programme
Targeted longer-term refinancing operations(financing of up to 4 years) - giving banks opportunity for borrowing funds over a longer period. Banks can access capital for up to four years in the future
Ex: Pandemic emergency purchase program

Question 20

SEE CHART OF RELATIONS Monetary policy notes

Answer 20

SEE chart of relations