3.6 Monetary policy

• What is monetary policy aimed at controlling?

  The total supply of money in the economy
• What are some objectives of monetary policy?

  Inflation, economic growth, low unemployment
• What inflation rate does the government aim for?

  About 2%
• What is the major objective of monetary policy?

  A low and stable rate of inflation
• Who is responsible for setting interest rates in the UK?

  The monetary policy committee at the Bank of England
• What factors are considered when setting interest rates?

  Exchange rate, availability of savings, labor market
• How can monetary policy objectives be achieved through interest rate adjustments?

  • Economic growth: Reduced interest rates increase spending, output, and employment.
  • Low unemployment: Reduced interest rates increase spending, output, and employment.
  • Price stability: Increased interest rates reduce spending, leading to price stability.
  • Healthier balance of payments: Increased interest rates reduce spending on imports.
• What is the money supply?

  The total amount of money in an economy
• What is quantitative easing?

  An injection of money into the banking system
• How does the central bank increase the money supply?

  By purchasing bonds from the banking system
• What effect does quantitative easing have on financial institutions?

  It builds up their capital, making them more likely to lend
• What happens to borrowers when financial institutions receive an injection of money?

  They find it easier to get loans
• How does a reduced bank rate of interest affect spending and saving?

  Increases spending and decreases incentive to save
• What is the relationship between lower costs of borrowing and economic activity?

  Lower costs boost spending in the economy
• How does monetary policy affect growth, employment, and price stability?

  • Growth: Lower interest rates increase spending and output.
  • Employment: Increased spending leads to higher employment.
  • Price Stability: Higher interest rates reduce spending, stabilizing prices.
• What is the goal of economic objectives?

  To encourage greater spending and investment
• How do monetary policies impact spending?

  They influence interest rates and money supply
• What happens when interest rates increase?

  It leads to higher costs of borrowing
• How does increased spending affect economic growth?

  It stimulates demand and production levels
• What are the effects of high-interest rates on savings and spending?

  • Higher interest rates increase savings returns
  • Higher costs discourage consumer spending
  • Borrowing becomes more expensive
• What is the relationship between savings and interest rates?

  Higher rates encourage more savings
• What does the term 'borrowing' refer to in economics?

  Obtaining funds to be paid back later
• How does an increase in consumer spending affect businesses?

  It can lead to higher sales and profits
• What factors influence consumer spending behavior?

  • Interest rates
  • Consumer confidence
  • Income levels
  • Economic conditions
• What is the impact of high-interest rates on consumer loans?

  They increase the cost of consumer loans
• What does 'saving attitude' refer to?

  Consumer willingness to save money
• How does a high saving rate affect the economy?

  It can slow down economic growth
• What are the consequences of increased consumer spending on the economy?

  • Boosts economic growth
  • Increases demand for goods and services
  • Can lead to inflation if excessive
• What is the significance of the term 'investment' in economics?

  It refers to allocating resources for future benefits
• How do economic policies affect consumer behavior?

  They shape spending and saving decisions
• What is the effect of a decrease in interest rates on borrowing?

  It makes borrowing cheaper for consumers
• What are the implications of high-interest rates on economic growth?

  • Slows down consumer spending
  • Reduces business investments
  • Can lead to economic contraction
• What does 'consumer spending' encompass?

  Expenditures made by households on goods
• Why is understanding interest rates important for consumers?

  It affects their borrowing and saving decisions
• How can consumers respond to rising interest rates?

  By reducing spending and increasing savings
• What are the potential risks of high consumer debt levels?

  • Increased financial vulnerability
  • Higher likelihood of defaults
  • Strain on personal finances