24 Monetary Policy

• What is the planet measure in the Triple Bottom Line?

  Recycling, waste reduction, using renewable energy, reducing emissions and carbon footprints
• What is a contractionary fiscal policy?

  Increasing taxation and/or reducing government expenditure
• What is an expansionary fiscal policy?

  Cutting taxation and/or increasing government expenditure
• What are the key taxation instruments of fiscal policy?

  Direct tax: Income tax; corporation tax; NI; Indirect tax: VAT; Customs and excise duties
• What is fiscal policy?

  The use of changes in tax rates or government spending to manage the economy
• What are some macro-economic objectives?

  Steady, real GDP growth; steady, low-level of inflation; low rate of unemployment; positive balance of payments; improving productivity; rising living standards
• What are the key spending instruments of fiscal policy?

  Government spending and government budget deficit/borrowing
• What does monetary policy control?

  The supply of money and how much it costs to borrow
• Who executes monetary policy in the UK?

  The Bank of England (the Central Bank)
• What is the typical target of government guidelines in monetary policy?

  An inflation rate
• What is the objective of monetary policy?

  To ensure macroeconomic stability
• What is the formula for GDP?

  GDP = C + I + G + (X - M)
• What does each variable in the GDP formula represent?

  1. personal consumption; I: investment; G: government purchases; X: exports; M: imports
• What does monetary policy seek to influence?

  The variables in the GDP formula to manage economic growth
• What is the largest element of GDP?

  C (personal consumption expenditures)
• How do interest rates affect the demand for credit?

  Higher interest rates increase the cost of borrowing
• What happens when the Bank of England raises interest rates?

  It increases the cost of borrowing and mortgage interest payments
• What is the effect of higher interest rates on consumer behavior?

  It increases the incentive to save rather than spend
• How do rising interest rates affect the value of the pound?

  Higher interest rates increase the value of the pound
• What is the impact of rising interest rates on government debt interest payments?

  Government debt interest payments increase
• What is quantitative easing (QE)?

  A monetary policy tool where central banks print money to buy back government bonds
• What is the effect of raising interest rates on inflation?

  Higher interest rates lead to less spending, which brings down the rate of inflation
• When did the Bank of England first begin using QE?

  In March 2009 in response to the Global Financial Crisis
• What happens when the Bank of England lowers interest rates?

  It supports the economy by boosting spending
• How does quantitative easing affect long-term interest rates?

  It brings down long-term interest rates
• What influences exchange rates?

  Interest rates, inflation, and confidence in the economy/currency
• How do higher interest rates affect demand for a currency?

  Higher interest rates encourage demand for a currency
• What is the effect of higher inflation on exports?

  Higher inflation makes exports less competitive
• What happens when the pound sterling appreciates in value?

  UK exports become more expensive abroad
• What is the effect of a depreciation of the pound sterling on UK exports?

  UK exports become more competitive
• What is the impact of a depreciation of the pound sterling on imports?

  Imports into the UK become more expensive
• What are the likely effects of a significant increase in interest rates on car manufacturers' profits?

  Increases the cost of finance, reducing profit after tax
• How does a stronger pound affect imported components for car manufacturers?

  Reduces the cost of imported components, increasing gross profit
• What is the effect of increased car prices on revenues for car manufacturers?

  Increases exported car prices, reducing revenues and gross profit
• How does an increase in the cost of finance affect car manufacturers' investment?

  Reduces propensity to invest, thus longer-term revenues and gross profit
• What is the impact of increased costs of finance on consumer demand for cars?

  Reduces demand for cars, reducing revenues and gross profit
• What are the key differences between fiscal and monetary policy?

  • Fiscal policy: Tax rates and government spending
  • Monetary policy: Supply of money (cash and credit) and interest rates
• How does reduced confidence affect consumer demand for cars?

  Reduces demand, reducing revenues and gross profit
• What are the main components of the GDP formula?

  1. C: Personal consumption expenditures
  2. I: Investment
  3. G: Government purchases
  4. X: Exports
  5. M: Imports
• What are the effects of exchange rate fluctuations on the economy?

  • Appreciation:
  • UK exports become more expensive
  • Imports become cheaper
  • Reduces inflation but also economic growth
  • Depreciation:
  • UK exports become more competitive
  • Imports become more expensive
  • Increases inflation but also economic growth