Monetary Policy

• What is the primary aim of monetary policy?

  Stable prices - Controlling inflation (2%)
• Who is responsible for controlling inflation?

  The Central Bank
• What is the definition of a Central Bank?

  A national bank providing financial services
• What are the two main functions of the Central Bank?

  Price stability and financial stability
• When was the Bank of England founded?

  1694
• What was the original purpose of the Bank of England?

  To fund the war against France
• What was the interest rate on February 25?

  4.5%
• What are the tools of monetary policy?

  • Interest rates
  • Money supply (Quantitative Easing)
  • Exchange rates
• What are the characteristics of expansionary monetary policy?

  • Interest rates decrease
  • Money supply increases
  • Exchange rate decreases
  • Aggregate demand (AD) increases
• What are the characteristics of contractionary monetary policy?

  • Interest rates increase
  • Money supply decreases
  • Exchange rates increase
  • Aggregate demand (AD) decreases
• How do interest rates affect the demand for loans?

  Higher rates decrease demand for loans
• What is the wealth effect in relation to housing demand?

  Increased housing demand boosts perceived wealth
• How does discretionary income affect mortgage holders?

  It influences their spending capacity
• What is the incentive to save when interest rates decrease?

  Lower rates reduce the appeal of saving
• How does a decrease in interest rates affect the exchange rate?

  It leads to a depreciation of the Pound
• What is real income?

  Income adjusted for inflation
• What is disposable income?

  Income after tax
• What is discretionary income?

  Income after tax, bills, and necessities
• What is the time lag period

  2 years