Monetary policy

• What is the primary purpose of monetary policy?

  To manage the economy using interest rates
• Who controls interest rates in the UK?

  Bank of England
• How often are interest rates reviewed by the Monetary Policy Committee?

  Monthly
• What are the two types of monetary policy?

  Reflationary and deflationary
• What happens to exchange rates when monetary policy is adjusted?

  They are affected by monetary policy changes
• What is reflationary monetary policy used for?

  • Used when inflation is falling
  • Aims to prevent recession
  • Interest rates are cut to encourage borrowing
  • Increases consumption and investment
  • Results in economic growth and reduced unemployment
• What is the effect of cutting interest rates in reflationary monetary policy?

  Encourages borrowing and increases spending
• What is deflationary monetary policy used for?

  • Used when inflation is rising
  • Aims to control inflation
  • Interest rates are raised to discourage borrowing
  • Reduces consumption and investment
  • Results in reduced economic growth and increased unemployment
• What is the effect of raising interest rates in deflationary monetary policy?

  Discourages borrowing and reduces spending
• What is expansionary monetary policy?

  1. Concerned with slow economic growth
  2. Interest rates may be cut
  3. Reduces savings ratio
  4. Makes borrowing more attractive
  5. Increases real national output
  6. Creates employment opportunities
• What is the effect of cutting interest rates on the savings ratio?

  It reduces the savings ratio
• How does cutting interest rates affect real national output?

  It increases real national output from Y to Y1
• What is the relationship between interest rates and inflation in monetary policy?

  Interest rates control inflation levels
• What is the goal of monetary policy regarding economic growth?

  To keep the economy growing
• What is the impact of monetary policy on unemployment?

  It can reduce unemployment through growth