Flashcards in Monetary Policy and Supply side Policy Deck (15):
Define monetary policy?
Government decisions which control the supply of money
What are examples of monetary policy?
-The interest rate
-The exchange rate
Which area of monetary policy is actually controlled by the British government?
-The interest rate is controlled by the government
What may changes in the interest rate affect?
-Exports and Imports
What would the effect of a fall in the interest rate be on households?
-A low interest rate causes consumers to spend more and save less
-A low interest rate reduces the opportunity cost of consumption
-Borrowing is cheaper and more accessible
-Mortgagee are cheaper
-demand for houses rises
-house prices rise
-increase the wealth effect
-Variable rate mortgagee
-payments go down
-discretionary income rises
What would the effect of a fall in the interest rate be on firms?
-Cost of borrowing falls for capital goods
-Investment is more likely
-Investment becomes less risky
-Rate of interest should be equal to or lower than the rate of return
-more consumption from households will lead to more investment from firms to meet demand
What would the effect of a fall in the interest rate be on exports?
-Low interest rates
-international savers withdraw their money
-exchange rate falls
-export price decreases
The extent of the effect of a fall in the interest rate on households, firms and exports?
-Households: -people may not even know what interest rate is
-Firms: -Other more significant factors
-More reluctant for larger firms because they have more people skilled in economics
-What if capital is produced from own funds?
-Exports:- Will only affect country's who have lots of people investing money from foreign countries like UK
What are advantages of changing interest rate for monetary policy?
-interest rates can be changed monthly
-most involved in borrowing and saving know the rate
-It has a wide reach:
-affects many households and firms
How is the Interest rate transmitted from the bank of England to consumers?
-Bank of England sets base rate
-> All other financial institutions like commercial banks set a range of interest rates (they decide)
-> customers chose the best one
What is the link with base interest rate set by the Bank of England and the interest rates set by commercial banks?
-The interest rate given by banks is based on the base rate given by the bank of England but it is not the same
-If the base rate is high, most interest rates will be high
-If the base rate is low, most interest rates will be low
Define Supply side policy?
Any government action aimed at increasing the productive capacity of a country
How is supply side policy achieved?
-Increasing the quantity of factors of production
-Increasing the quality of factors of production
Examples of supply side policy?
-reduce corporation tax
-subsidies for research and development to produce more efficient technologies
-ensuring appropriate quality of and wide access to education
-assistance and finance for business start-ups
-skills related training e.g. apprentice schemes.
-reducing power of trade unions
-cutting benefits to the unemployed