Monetary policy

• What is the primary focus of monetary policy?

  Setting interest rates
• What does monetary policy primarily control?

  Money supply, interest rates, and exchange rates
• How does monetary policy affect aggregate demand?

  It influences demand-side economic factors
• What is the most important tool of monetary policy?

  The ability to set interest rates
• How do interest rates influence other components of monetary policy?

  They affect money supply and exchange rates
• What is contractionary monetary policy?

  Reducing aggregate demand using high interest rates
• What is expansionary monetary policy?

  Increasing aggregate demand using low interest rates
• What trade-off exists in monetary policy?

  Achieving all macroeconomic objectives simultaneously
• What is the main aim of monetary policy in the UK?

  To ensure price stability
• Who sets interest rates in the UK?

  The Monetary Policy Committee (MPC)
• What is the current inflation target set by the UK government?

  2% inflation
• What happens if inflation misses the target by more than 1%?

  The governor must write to the Chancellor
• What action does the MPC take if inflation is likely to exceed 3%?

  Increase the official rate of interest
• How does a stable low rate of inflation help the government?

  It achieves macroeconomic stability
• Why is the Bank of England independent?

  To set interest rates based on economic needs
• What must the Bank of England do if inflation is more than 1% away from the target?

  Write an open letter to the Chancellor
• What economic data does the MPC consider when making decisions?

  House prices, output gaps, exchange rates
• Why must the MPC consider interest-rate changes carefully?

  They can have a huge economic effect
• What is a ripple effect in the context of interest rates?

  Small changes affect the entire economy
• What are some effects of a rise in interest rates?

  Less borrowing, more saving, less investment
• How does the Bank Rate influence other interest rates?

  It leads to changes in mortgage and loan rates
• What happens when banks need to borrow money simultaneously?

  They pay a higher interest rate
• How do high UK interest rates affect the pound?

  They increase demand for the pound
• What is 'hot money' in the context of interest rates?

  Short-term money movement to high-interest areas
• What happens to the exchange rate when demand for the pound increases?

  The pound's exchange rate rises
• How does a high exchange rate affect UK exports?

  It makes them more expensive
• What is the effect of a high exchange rate on the current account?

  It worsens the current account
• How do high UK interest rates affect imports?

  They make imports cheaper
• What happens when UK interest rates fall?

  The exchange rate of the pound falls
• How do falling interest rates affect UK exports and imports?

  Exports increase, imports decrease
• Why does the Bank of England need to look two years into the future?

  To anticipate the effects of interest rate changes
• What is the typical lag time for the maximum effect on firms after interest rate changes?

  About one year
• What is the typical lag time for the maximum effect on consumers after interest rate changes?

  About two years
• What are 'typical' lags in the context of monetary policy?

  Time lags between interest rate changes and effects
• Why is it important for the Bank of England to consider future impacts?

  To make informed interest rate decisions