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16 Cards in this Set
- Front
- Back
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What is monetary policy? |
The manipulation of the money supply or interest rate to influence the level of total spending in the economy, and therefore economic activity. |
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Who is responsible for setting interest rates? |
Since 1997, the Monetary Policy Committee of the Bank of England has been responsible for setting interest rates. |
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What is the objective of the monetary policy committee? |
The MPC meet once a month to determine interest rates, in order to control aggregate demand and meet the inflation target set by the government (currently 2%). |
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When does inflation occur? |
When AD is close to or the same as productive capacity. |
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What is contractionary monetary policy? |
Policy which seeks to restrict the growth of AD by raising the interest rate or reducing the money supply. It may be used to try to reduce demand pull inflation by decreasing AD. |
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What is expansionary monetary policy? |
Policy that looks to increase Aggregate Demand by lowering interest rates and increasing the money supply. It may be used to increase output and employment. |
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What happens to savings if interest rates change? |
If interest rates fall, the reward for saving will be lower and thus savings will decrease and consumer spending will rise. If interest rates rise, the reward for saving will increase and thus savings will increase and consumer spending will decrease. |
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What happens to household borrowing if interest rates change? |
If interest rates fall, borrowing will be cheaper. Therefore household borrowing and consumer spent will increase. If interest rates rise, there will be a higher cost of borrowing. Therefore household borrowing and consumer spending will fall. |
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How will a change in interest rates affect mortgage repayments? |
If interest rates fall, less interest will be paid on mortgages, meaning mortgage repayments decrease, discretionary income and consumer spending increases. If interest rates rise, more interest will be paid on mortgages. Thus, discretionary income and consumer spending will decrease. |
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What will the effect of a change in interest rates he on consumer expenditure? |
If interest rates fall, borrowing will be cheaper, so consumers will have more discretionary income. Thus, consumer spending increases. If interest rates rise, borrowing will be more expensive so consumers will have less discretionary income. Consumer spending will fall. |
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Will a change in interest rates affect investment by firms? |
If interest rates fall, the cost of borrowing will be lower and so investment will increase. If interest rates rise, the cost of borrowing will be higher and so investment will decrease. |
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What effect will a change in interest rates have on exchange rates/international trade? |
If interest rates fall, hot money will flow out of the country, meaning the exchange rate will depreciate. Exports will become more price competitive, whilst imports become less competitive. AD will rise. If interest rates rise, hot money will flow into the country. The exchange rate will appreciate, making exports less competitive and imports more competitive. AD will fall. |
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How will a change in interest rates affect asset prices? |
If interest rates fall, there will be a decreased reward for saving/cost of borrowing, leading to less savings and increased demand for assets. Thus leads to higher asset prices. Consumers feel wealthy, leading to higher consumer spending. If interest rates rise, there will be an increased reward for saving/cost of borrowing, leading to greater savings and less demand for assets. Therefore, there will be lower asset prices. Consumers feel less wealthy, leading to a fall in spending. |
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What is quantitative easing? |
This involves putting additional money into the banking system (the Bank of England creates money to buy bonds from banks), meaning banks will have more money to lend to individuals and firms, at lower interest rates (S+D). This will increase consumer spending and investment. |
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Draw a flow diagram of quantitative easing. |
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Why might Quantitative easing be risky? |
Banks may use the money to rebuild their reserves instead of spend it. If too much money is put into the system there is a danger of hyperinflation. |
