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45 Cards in this Set
- Front
- Back
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When was the bank of England (the Uk's central bank) established? |
1684 |
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What is the bank of England responsible for? |
Thehealth of the UK’s financialsystem The confidencein the UK currency ~ “ThePound Sterling” |
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What is the main aim of monetary policy? |
Helpkeep macroeconomic stability in the economy To maintain the value ofmoney – i.e. achieve price stability |
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Define inflation |
A sustained rise in the general price level of goods and services. |
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Define monetary policy |
Management of interest rates and the money supply in order to manipulate the level of aggregate demand |
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Define interest rate |
Cost of borrowing money |
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Define Consumer price index |
Average household cost of living excluding housing costs |
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Define deflation |
Sustained fall in the general price level of goods and services. |
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Define demand-side politics |
Monetary and fiscal policies designed to manipulate the level of aggregate demand. |
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What are the 3 things monetary policy uses? |
Interest rates Quantitive easing 'QE' Banking regulations |
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Give an example of how monetary policy uses interest rates |
Bank base rate |
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Give an example of how monetary policy uses quantitative easing |
Asset purchases |
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Give an example of how monetary policy uses Banking regulations |
Ensure the financial sector has enough reserves |
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What does monetary policy attempt to control? (3) |
Growth of AD (C+I+G+X-M) relative to the economies productive potential Demand and supply of money and credit Occasionally the value of the exchange rate |
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Who does a change in interest rates effect? |
Exporters savers morgage borrowers pensioners importers spenders credit card holders |
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when did the responsibility of monetary policy change? |
1997 |
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In 1997 who did the responsibilaty of the monetary policy shift to and from |
From treasury to the bank of england |
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Who sets the inflation target? |
Govenment |
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What is the main objective of monetary policy? |
price stabilety |
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What is the inflation target for the bank of england |
–2.0%(+/- 1%) |
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What does pre-emptive mean? |
(forward-looking)i.e. raise interest rates before inflation accelerates, or cut interest ratesto avoid an inflation under-shoot / economic recession |
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What recently changed the way monetary policy was used? |
The 2008 Financial Crisis theBank of England takes a broader view about the health of the economy whenconsidering how and when tomeet its inflation target |
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What is the bank base rate |
The interest rate at which The Bankof England lends to majorUK banks forshort periods to maintain adequate financial resources ( ‘liquidity’) in the UK banking system. |
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Whenmaking decisions on whether or not to change interest rates, the monetarypolicy committee(MPC) will consider which economicfactors? (2) |
Economic conditions in the Uk economy Trends and fluctuations in the european and global economy |
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Who is the governor of the bank of England? |
Mark Carney (Canadian) |
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When do the MPC announce changes in IR? |
FirstThursday of every month at 12 noon. |
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What 3 categories of factors do MPC have to consider? |
Demand side factors Supply side factors International factors |
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Demand-side factors |
•Real GDP growth•Estimate of the output gap•Consumer spending•Net Exports (Trade)•Government spending•House Prices•Unemployment•Consumer borrowing•Business & Consumer Confidence |
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Supply-side factors |
•Wages and earnings•Labour Shortages•Import prices•Commodity prices (e.g. oil) |
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InternationalFactors |
•Sterling Exchange Rate•Global Inflation Trends |
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When interest rates rise what happens to strength of the £ |
Demand for £ rises Leads to ‘stronger’£ |
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What happens to net trade when interest rates rise? |
SPICED stands for:StrongPoundImportsCheaperExportsDearer So Net Trade worsens |
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When interest rates fall what happens to strength of the £ |
Demand for £ falls Leads to ‘weaker’ £ |
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What happens to net trade when interest rates fall? |
WPIDEC stands for:WeakPoundImportsDearerExportsCheaper So Net Trade improves |
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Define contractionary monetary policy |
When an - Increase in Interest Rates, - Reversal of QE- Tightening of BankingRegulationsLeads to a Leftward Shift in AD |
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What is another word for contractionary monetary policy |
Deflationary |
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Define expansionary monetary policy |
When a - Reduction in Interest Rates, - Expansion of QE- Loosening of Banking RegulationsLeads to a Rightward Shift in AD |
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What is another word for expansionary monetary policy |
Inflationary |
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What are the 4 channels of monetary policy? |
Interest rate channel Bank lending channel Exchange rate channel Wealth effect channel |
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What is the Interest rate channel |
ExpansionaryMonetary Policy LowerInterest Rates StimulateInvestment Spending Increasein Economic Activity |
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What is the Bank lending channel |
ExpansionaryMonetary Policy Increasein Bank Loans StimulateConsumer Spending Increasein Economic Activity |
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What is the Exchange rate channel |
ExpansionaryMonetary Policy ExchangeRate Depreciation StimulateExports Increasein Economic Activity |
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What is the Wealth effect channel |
ExpansionaryMonetary Policy Rise in Equity Prices OR Risein Land and House Prices Risein Value of Financial Wealth Increasein Economic Activity |
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Define disposable income |
posttax income after the effects of mortgage interest repayments |
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What are the evaluation points for this topic? |
Mortgageinterest rates do not always follow base rate change Many home-owners are on fixed rate mortgages People in rented property see no direct effects from changes Credit-card lenders may not change rates immediately If businesses are operating with spare capacity, a fall in rates will notnecessarily lead to higher planned capital investment Many sources of funding for capital spending (e.g. loans and debentures) are atfixed rates of interest Lower interest rates causes a fall in the effective disposable income ofmillions of people with net savings |
