Monetary Policy

• What are the main instruments of monetary policy?

  Interest rates and money supply
• Who sets the instruments of monetary policy in the UK?

  The Bank of England's Monetary Policy Committee
• How often does the Monetary Policy Committee meet?

  Every month
• What monetary policy instrument is not utilized by the UK?

  Exchange rates
• What action did the Bank of England take in March 2009?

  Reduced interest rates by 0.5%
• What is quantitative easing?

  Injecting money into the economy by buying assets
• How much did the Bank of England buy in bonds in 2009?

  £375 billion
• Why might the Bank of England's interest rate policy not fully work?

  Banks may not pass on lower rates to customers
• What is the intended effect of quantitative easing?

  To stimulate lending and aggregate demand
• What happens to disposable income when interest rates fall for mortgage holders?

  Disposable income increases
• What is "hot money" in the context of interest rates?

  Funds moving to countries with higher interest rates
• What is the unintended consequence of higher interest rates on the exchange rate?

  It strengthens the pound
• How do higher interest rates impact inflation?

  They help restrain inflation
• What is forward guidance?

  Assurances about future interest rates
• Who implemented forward guidance in the UK?

  Mark Carney
• What does QE stand for in economic policy?

  Quantitative Easing
• How does QE affect the supply of loans?

  QE increases the supply of loans
• What is a drawback of forward guidance?

  It reduces future policy flexibility
• What does the transmission mechanism outline?

  The flow of variables from interest rate changes
• What happens to market interest rates due to QE?

  Market interest rates decrease
• What is the effect of increased borrowing and spending on inflation?

  It causes demand-pull inflation
• What is a potential lag time for interest rate changes to impact the economy?

  6-18 months
• How does the level of spare capacity affect QE's inflationary effects?

  Greater inflation occurs near full employment
• What is a credit crunch?

  When banks are reluctant to lend
• Why is QE typically used following a recession?

  It follows a fall in aggregate demand
• How do interest rates affect homeowners with variable-rate mortgages?

  They impact monthly mortgage repayments
• What risk is associated with increased borrowing due to QE?

  Heightened potential for a financial crisis
• What percentage of UK households are owner-occupied?

  63%
• How might banks respond to increased competition for customers?

  They may reduce lending criteria
• What was a main cause of inflation in the 1970s UK?

  Oil prices increasing by 300%
• What is 'subprime lending'?

  Lending to less financially secure borrowers
• How do interest rates primarily combat inflation?

  By influencing aggregate demand components
• What could happen to future consumption and investment due to unsustainable borrowing?

  They may fall as debts increase
• What is a potential risk of increased borrowing due to quantitative easing?

  Heightened potential for a financial crisis
• How does QE affect wealth inequality?

  It increases wealth for the already wealthy
• How does quantitative easing affect wealth inequality?

  It can increase inequality among investors
• What happens to the value of investments owned by the rich during QE?

  The value of investments increases
• What can lead to cost-push inflation during quantitative easing?

  Investment in commodities like oil and food
• What might banks do with the cash from selling government bonds?

  Invest it in other assets
• What is the relationship between spare capacity and inflation during quantitative easing?

  QE has greater inflationary effects near full employment