Monetary policy

• What type of policy is monetary policy classified as?

  Demand side policy
• How many branches does monetary policy have?

  Three branches
• What are the three branches of monetary policy?

  Interest rates, money supply, exchange rate
• Why are interest rates considered the "Big Daddy" of monetary policy?

  They have the most significant impact
• What is expansionary monetary policy?

  Policy that increases aggregate demand
• What is contractionary monetary policy?

  Policy that reduces aggregate demand
• What happens to aggregate demand when interest rates are reduced?

  It increases and shifts to the right
• How do interest rates affect the cost of borrowing?

  Lower rates reduce borrowing costs
• What happens to the rate of return on savings when interest rates fall?

  It decreases
• What is discretionary income?

  Income left after taxes and bills
• How did low interest rates during the recession affect mortgage holders?

  They benefited from lower repayments
• What happens to the demand for housing when interest rates are low?

  It increases due to cheaper mortgages
• How do lower interest rates affect the demand for loans?

  They increase the demand for loans
• How do interest rates affect the exchange rate?

  Lower rates can lead to a weaker exchange rate
• What is the relationship between interest rates and net exports?

  Lower rates can increase net exports
• What is the effect of expansionary monetary policy on aggregate demand?

  It shifts aggregate demand to the right
• What is the impact of contractionary monetary policy on the economy?

  It reduces growth and increases unemployment
• How do lower interest rates affect investment?

  They increase investment by reducing costs
• Who typically controls monetary policy?

  Central banks
• What is the target inflation rate for the Bank of England?

  2%
• What is one benefit of inflation targeting?

  It keeps inflation expectations under control
• How does targeting inflation affect interest rates?

  It allows for lower interest rates
• What are the main components of monetary policy?

  • Interest rates
  • Money supply
  • Exchange rate
• What are the dual effects of lower interest rates?

  • Increases aggregate demand
  • Increases long-run aggregate supply through investment
• What is the role of the Monetary Policy Committee?

  • Decide interest rates
  • Target inflation
  • Control monetary policy
• What happens to consumer behavior when inflation expectations are controlled?

  • Prevents sharp changes in consumption
  • Stabilizes economic growth
• What is the impact of expansionary monetary policy on unemployment?

  • Reduces unemployment
  • Stimulates economic growth