Supply Side Policy Flashcards
(6 cards)
What is a monetary policy?
Actions taken by the country’s central bank to influence the availability and cost of money/credit to achieve macroeconomic objectives.
ie controlling inflation, maintaining employment, and economic growth.
What are interest rates as an instrument of monetary policy?
Interest Rates (IR) are the costs of borrowing, and return on saving, set by the central bank to influence economic activity.
How does changing Interest Rates stimulate the economy?
Raising Interest Rates: Discourages borrowing and spending, aiming to cool down an overheated economy and control inflation (reduce Aggregate Demand).
Reducing Interest Rates: Encourages borrowing and spending by businesses and consumers, stimulating economic growth (increasing Aggregate Demand).
What are the short term and long term effects of changing interest rates to economic growth?
Short-term impact: Immediate influence on borrowing costs and economic activity, providing a SR ‘fix’ to low demand/ economic crises.
Long-term impact: influences expectations about future inflation and economic conditions (as it signals to economic agents about controlling inflation, leading to the future expectatiion of lower prices).
What is the definition of Quantitative Easing (QE)?
When the central bank buys financial assets to inject liquidity into the economy.
A non-traditional monetary tool.
What is the mechanism of Quantitative Easing?
The central bank buys government bonds and other financial assets, increasing the money supply and lowering the Interest Rate on these assets.
Lower yields (IR) on bonds push investors towards riskier investment like stocks, stimulating economic activity.
