2.6.1 Monetary policy

• Monetary policy refers to the actions taken by a central bank to control the money supply and interest rates to promote economic growth, stability, and low inflation
• The Bank of England may lower interest rates during a recession to stimulate borrowing and spending.
• Match the objective of monetary policy with its description:

  Economic Growth ↔️ Increase in production of goods and services over time

  Stable Prices ↔️ Control inflation to maintain purchasing power

  Full Employment ↔️ Minimize unemployment rate

  Balance of Payments ↔️ Manage international trade and capital flows
• Lower interest rates encourage borrowing and spending, while higher rates curb inflation
• Open market operations involve the central bank buying or selling government securities to control the money supply.
• Steps in the implementation of monetary policy:

  1️⃣ Setting the policy rate

  2️⃣ Open market operations

  3️⃣ Reserve requirements

  4️⃣ Forward guidance

  5️⃣ Monitoring and adjustments
• Match the monetary policy measure with its purpose:

  Interest Rate Adjustment ↔️ Influence borrowing costs and economic activity

  Open Market Operations ↔️ Inject or withdraw liquidity from the money supply

  Reserve Requirements ↔️ Control the amount of available funds for lending
• What is the formula for calculating the growth rate of GDP?

  $\frac{\text{Current GDP} - \text{Previous GDP}}{\text{Previous GDP}} \times 100$
• Monetary policy uses interest rates to influence borrowing costs and control inflation
• The Quantity Theory of Money states that MV = PQ, where M is money supply, V is velocity, P is price levels, and Q is real output.
• The Quantity Theory of Money is expressed by the formula MV = PQ
• Monetary policy uses four main tools to control the economy.
• Match the monetary policy tool with its effect:

  Interest Rates ↔️ Stimulates or curbs spending

  Reserve Requirements ↔️ Changes loanable funds

  Open Market Operations ↔️ Controls money supply

  Quantitative Easing ↔️ Lowers long-term interest rates
• What is the key interest rate set by the Bank of England called?

  Base rate
• Steps in the implementation of monetary policy

  1️⃣ Set the policy rate

  2️⃣ Open market operations

  3️⃣ Reserve requirements

  4️⃣ Forward guidance

  5️⃣ Monitoring and adjustments
• Buying government securities increases the money supply and lowers short-term interest rates
• Lowering reserve requirements frees up more funds for lending.
• What is forward guidance in monetary policy?

  Communicating policy intentions
• Central banks monitor economic indicators to adjust policy tools.
• Lower interest rates stimulate investment and consumption, boosting GDP growth.
• Match the economic formula with its purpose:

  Growth Rate ↔️ Measures GDP increase

  Inflation Rate ↔️ Measures price level changes

  Unemployment Rate ↔️ Measures joblessness
• Monetary policy is always effective in boosting economic growth during recessions.

  False
• Reducing inflation is effectively achieved by raising interest rates
• How does monetary policy influence full employment?

  Encourages business expansion
• The responsiveness of commercial banks and the public affects the effectiveness of monetary policy.
• The central bank uses tools like interest rates to influence the economy
• Stimulating investment and consumption is effective in boosting GDP growth during recessions.
• What tool is effective in reducing inflation?

  Raising interest rates
• Lowering interest rates encourages business expansion and job creation
• The effectiveness of monetary policy depends on the state of the economy and public responsiveness.
• What are the objectives of monetary policy?

  Economic growth, price stability, full employment
• Lowering interest rates during a recession can stimulate economic activity
• Stimulating investment and consumption can boost GDP growth during recessions.
• What is the effect of raising interest rates on inflation?

  Reduces inflation
• Commercial banks and the public must respond to policy signals
• The effectiveness of monetary policy is independent of economic conditions.

  False
• Match the tool of monetary policy with its effect:

  Interest rates ↔️ Influence borrowing costs

  Open market operations ↔️ Adjust bank reserves

  Quantitative easing ↔️ Increase money supply
• What is the primary goal of lowering interest rates during a recession?

  Stimulate economic activity
• The effectiveness of monetary policy is evaluated based on its ability to achieve its objectives
• The growth rate formula measures the percentage change in GDP.