Monetary Policy

• What does monetary policy involve?

  Changes to interest rates, money supply, exchange rate
• What is the primary goal of monetary policy?

  To influence aggregate demand
• How does monetary policy differ from fiscal policy?

  Monetary policy is enacted by central banks
• What is the mandate of central banks worldwide?

  To control inflation
• What is the inflation target for the Bank of England?

  2%
• What are the two types of monetary policy?

  Expansionary and contractionary
• What is the purpose of expansionary monetary policy?

  To boost aggregate demand
• Why would a central bank use contractionary monetary policy?

  To reduce inflation when it exceeds target
• What is one goal of macroeconomic stability?

  To achieve other macroeconomic objectives
• How can contractionary monetary policy help the financial sector?

  By preventing excessive growth of house prices
• What is a potential risk of excessive credit in the economy?

  Financial sector collapse
• How can higher interest rates promote saving?

  By providing a better return on savings
• What effect does contractionary monetary policy have on the current account deficit?

  It can help reduce the deficit
• What is the monetary policy transmission mechanism?

  How interest rate cuts affect the economy
• What happens to credit card interest rates when the central bank cuts rates?

  They generally decrease
• How does lower borrowing costs affect consumer behavior?

  It incentivizes more borrowing and spending
• What happens to savings interest rates when the central bank cuts rates?

  They typically fall
• How do lower mortgage rates affect disposable income?

  They increase disposable income
• What is the effect of lower interest rates on business loans?

  They reduce borrowing costs for businesses
• What is 'hot money' in the context of monetary policy?

  Savings that chase the best interest rate
• What happens to the currency when there are hot money outflows?

  The currency depreciates
• How does expansionary monetary policy affect aggregate demand?

  It shifts aggregate demand to the right
• What is the link between expansionary monetary policy and long-run aggregate supply?

  Investment can boost long-run growth
• What is the core intention of expansionary monetary policy?

  To boost aggregate demand
• What are the effects of expansionary monetary policy on the economy?

  • Increases aggregate demand
  • Lowers interest rates
  • Boosts consumer spending
  • Encourages business investment
  • Can lead to inflation if demand exceeds supply
• What are the potential risks of contractionary monetary policy?

  • Reduced economic growth
  • Increased unemployment
  • Lower consumer spending
  • Potential recession