Monetary Policy

• What is expansionary monetary policy?

  Policy to decrease interest rates and increase money supply
• What is discretionary income?

  Income remaining after taxes and essential costs
• What is contractionary monetary policy?

  Policy to increase interest rates and decrease money supply
• What is quantitative easing?

  Increasing liquidity by purchasing assets from banks
• What is hot money?

  Short-term capital flow responding to interest rates
• What is a liquidity trap?

  When low interest rates fail to stimulate the economy
• What limits the effectiveness of monetary policy?

  • Time lags
  • Lack of targeting specific sectors
  • Business and consumer confidence
  • Liquidity trap
  • Monetary policy asymmetry
• What is asymmetric inflation targeting?

  Intervention only when inflation is too high
• What are interest rates?

  The price of borrowing money
• What is monetary policy?

  Central bank's attempts to control aggregate demand
• What is money supply?

  Stock of money in the economy
• What is symmetric inflation targeting?

  Intervention when inflation is too high or too low
• How do low interest rates affect consumer spending?

  • Cheaper borrowing from banks
  • Reduced opportunity cost of saving
  • Increased disposable income
  • Higher demand for housing
• How do low interest rates affect investment?

  • Cheaper borrowing for firms
  • Increased funding for R&D
  • Encouragement of capital investment
• How do low interest rates affect government spending?

  • Lower government debt repayments
  • Encouragement to issue more bonds
  • Higher levels of government spending
• When is quantitative easing used?

  When standard monetary policy is ineffective
• What are the effects of quantitative easing on banks?

  • Increased lending to households and firms
  • Stimulated total demand in the economy
  • Risk of banks hoarding cash
• What are the effects of quantitative easing on government?

  • More cash for investment in the economy
  • Funding for training and education
  • Increased capital spending
• What are the limitations of monetary policy?

  • Base rate not passed to consumers
  • Banks unwilling to lend despite low rates
  • Low consumer confidence affects spending
• What happens when interest rates are above equilibrium?

  Supply of money exceeds demand, causing rates to fall
• What is depicted in a liquidity trap diagram?

  Change in money supply doesn't change interest rates
• What are the two types of supply-side policies?

  • Market-based policies
  • Interventionist policies
• What is the main interventionist policy?

  Training and education
• How do interventionist policies affect productivity?

  • More skilled workers
  • Increased output with same input
  • Rightward shift of LRAS curve
• How do interventionist policies affect cyclical unemployment?

  • Boosts aggregate demand
  • Reduces unemployment initially
  • Requires more employees for increased demand
• How do interventionist policies affect structural unemployment?

  • Equips workers with diverse skills
  • Reduces occupational immobility
  • Matches skills with job requirements
• How do interventionist policies affect inflation?

  • Demand curve shifts right
  • LRAS curve shifts outward
  • Inflationary effects may be eliminated
• How do interventionist policies exploit economies of scale (E.O.S)?

  • Prices may fall as output increases
  • Lower average costs for firms
  • Reduced consumer prices
• How do interventionist policies affect the financial account?

  • Improves financial account state
  • Attracts more FDI
  • Higher profit margins and domestic demand
• How do interventionist policies affect the current account deficit?

  • More price-competitive goods and services
  • Increased exports if imports remain constant
  • Reduces current account deficit
• What is an evaluation of interventionist policy in T&E?

  • Time lag in effectiveness
  • Relative quality of education matters
  • May not fix immediate issues
• What are three examples of market-based policies?

  • Privatization
  • Deregulation
  • Reducing taxes
• How does deregulation affect productivity?

  • Increases potential productivity
  • Reduces prices for consumers
  • Helps achieve economic welfare
• What is a potential conflict between economic growth and inflation?

  • Growing economy may cause inflationary pressures
  • Positive output gap leads to faster AD increase
• What is a potential conflict between economic growth and the current account?

  • High consumer spending increases imports
  • Worsens current account deficit
  • Export-led growth can lead to surplus
• What is a potential conflict between economic growth and government budget deficit?

  • Reducing deficit requires less expenditure
  • Leads to fall in AD and economic growth