Monetary policy

• What is the purpose of monetary policy?

  To control the money flow of the economy
• How does the government implement monetary policy?

  Through interest rates and quantitative easing
• Which institution conducts monetary policy in the UK?

  The Bank of England
• What is the role of the Monetary Policy Committee (MPC)?

  To alter interest rates to control money supply
• How many members are in the MPC?

  Nine members
• What is the government’s inflation target in the UK?

  2%, measured by CPI
• What happens when interest rates are high?

  Consumers save more and spend less
• What is the effect of low interest rates?

  Encourages spending and investment
• What was the historic low interest rate in the UK after the financial crisis?

  0.5%
• What is the role of the Bank of England as a lender of last resort?

  To lend money when liquidity is low
• What is quantitative easing (QE)?

  Asset purchases to stimulate the economy
• What is "hot money" in the context of interest rates?

  Investment attracted by high interest rates
• When is QE typically used?

  When inflation is low and rates can't drop
• How does QE affect the money supply?

  It increases the quantity of money
• What is a potential effect of QE on inflation?

  It could lead to higher inflation
• What limitation exists regarding banks and interest rates?

  Banks might not pass rates to consumers
• Why might consumers be unable to borrow despite low rates?

  Banks may be unwilling to lend
• When are interest rates more effective in stimulating spending?

  When consumer and firm confidence is high
• What is a liquidity trap?

  When money supply changes don't affect rates
• What is inflation targeting?

  A policy setting a target inflation rate
• What happens if inflation falls outside the target?

  The Governor must explain to the Chancellor
• How does inflation targeting benefit consumers and firms?

  It provides price stability for decision-making
• What is a potential conflict of inflation targeting?

  It may restrict responses to economic crises
• What are the main instruments of monetary policy?

  • Interest rates
  • Quantitative easing
• What are the limitations of monetary policy?

  • Banks may not pass base rates to consumers
  • Consumers may be unable to borrow despite low rates
  • Effectiveness depends on consumer and firm confidence
• What are the effects of high and low interest rates on consumer behavior?

  High interest rates:

  • Encourage saving
  • Discourage spending

  
  

  Low interest rates:

  • Discourage saving
  • Encourage spending and investment