Ch. 31

• What does monetary policy involve?

  Decisions on money supply and interest rates
• What is money supply?

  The quantity of money in circulation
• What is the role of a central bank?

  Banker to the government and financial regulator
• What is the Bank of England?

  The UK’s central bank
• What is the transmission mechanism of monetary policy?

  The channel through which monetary policy affects demand
• What is inflation targeting?

  Setting interest rates to meet an inflation target
• What is the Monetary Policy Committee (MPC)?

  The body responsible for monetary policy at the Bank of England
• What is the bank rate?

  The interest rate set by the MPC
• What is a liquidity trap?

  When interest rates cannot fall further
• What is quantitative easing?

  Increasing liquidity by purchasing assets
• What are the main functions of a central bank?

  • Issue coins and banknotes
  • Act as banker to commercial banks
  • Regulate the financial system
• How does the transmission mechanism of monetary policy work?

  • Affects interest rates
  • Influences consumer spending
  • Impacts investment decisions
  • Alters aggregate demand
• What are the implications of a liquidity trap for monetary policy?

  • Interest rates cannot be lowered further
  • Monetary policy becomes ineffective
  • Aggregate demand remains unchanged