Central banks and monetary policy

• What is the role of the Bank of England as a lender of last resort?


  The Bank of England lends money to increase liquidity when no other methods are available.
• Under what circumstances might the Bank of England lend to a risky institution?


  When the institution has no other way to borrow money.
• How does the Bank of England protect individuals who deposit funds in a bank?

  It prevents a 'run on the bank' by providing liquidity to banks.
• What is a 'run on the bank'?

  It is when consumers withdraw their deposits in panic, fearing bank failure.
• Why do banks usually avoid borrowing from the lender of last resort?

  Because it indicates financial difficulties and reduces depositor confidence.
• What effect does a reduction in interest rates have on Aggregate Demand?

  It affects all components of Aggregate Demand (C+I+G+X-M).
• How do low interest rates affect consumer spending?

  They reduce the opportunity cost of saving and make borrowing cheaper.
• How do lower interest rates benefit households with variable rate mortgages?

  They lead to lower repayments, increasing disposable income.
• What is the marginal propensity to consume?

  It is the increase in consumer spending resulting from an increase in disposable income.
• How do lower base rates affect the housing market?

  They increase the number of mortgages taken out, raising demand for houses.
• What is the price elasticity of supply (PES) in relation to housing in the UK?

  The supply of houses in the UK is PES inelastic.
• What is the positive wealth effect?

  It is when people spend more as they feel richer due to rising asset prices.
• How do low interest rates affect firm investment?

  They make borrowing cheaper, encouraging firms to invest in R&D and other projects.
• What is Samuleson's accelerator effect?

  It states that investment increases when consumer spending increases, as investment is a derived demand.
• What is the objective of monetary policy?

  To control the money flow in the economy using various policy tools.
• Who conducts monetary policy in the UK?

  The Bank of England.
• What are the main tools of monetary policy covered in the AS specification?

  Interest rates and quantitative easing.
• What is the role of the Monetary Policy Committee (MPC) in the UK?

  The MPC alters interest rates to control the supply of money.
• How many members are in the Monetary Policy Committee (MPC)?

  Nine members.
• How often does the MPC meet to discuss interest rates?

  Eight times a year.
• What is the target inflation rate set by the government?

  2% inflation rate.
• What is the base rate?

  It is the interest rate set by central banks for lending to other banks.
• What are the functions of a central bank?

  The central bank manages currency, money supply, and interest rates in an economy.
• Name three examples of central banks.

  European Central Bank, Bank of England, People's Bank of China.
• How does a central bank prevent forgery of physical cash?

  By using secure methods to issue notes and coins.
• What services does the central bank provide to the government?

  It collects payments, makes payments, and manages public debt.
• How do low interest rates affect government spending?

  They lower government debt repayments, encouraging more bond issuance and spending.
• What is 'hot money' in the context of interest rates?

  It is money that flows in search of the highest interest rates for short-term profits.
• How do low interest rates affect the flow of hot money?

  They reduce the flow of hot money into the economy.
• What happens to the exchange rate when there is a low interest rate?

  It weakens the exchange rate by increasing the supply of currency on FOREX markets.
• How does a weak pound affect exports and imports?

  A weak pound makes exports cheaper and imports more expensive.
• What is quantitative easing (QE)?

  It is a monetary policy used to stimulate the economy when standard methods are ineffective.
• How does the Bank of England implement quantitative easing?

  By electronically creating money to buy government and bank bonds.
• What is the expected outcome of quantitative easing?

  To increase overall demand by encouraging banks to lend more.
• What is a potential concern regarding banks and quantitative easing?

  Banks may hesitate to lend due to concerns about clients' repayment abilities.
• How does the purchase of government bonds by the central bank affect government spending?

  It provides the government with funds to spend more in the economy.
• What happens if the Bank of England stops purchasing government bonds?

  It leads to reduced lending by banks and delayed government spending.
• What is the target inflation rate for the Bank of England?

  2% CPI.
• What is a limitation of quantitative easing regarding currency supply?

  It can lead to depreciation of the currency on FOREX markets.
• How does quantitative easing affect long-term interest rates?

  It lowers long-term interest rates due to increased money supply.