Demand side policies: Monetary Policy (Pack 9)

• What does 'interest rates' refer to?

  The cost of borrowing money expressed as a percentage
• What is 'expansionary monetary policy'?

  Policy to increase money supply and lower interest rates
• How can increasing the money supply affect aggregate demand (AD)?

  It can increase aggregate demand by boosting spending
• What are the benefits of using expansionary monetary policy to achieve economic objectives?

  • Stimulates economic growth
  • Reduces unemployment
• What are the drawbacks of using monetary policy?


  • Time lag (Transmission lag as they take 2 years to take full effect)
  • Currency depreciation (Contractionary)
  • May not be significant due to the majority having a fixed rate mortgage
  • Lower interest rates make demand for houses affordable and push up house prices for those, benefiting those who own a home (Income equality)
• What role does the central bank play in monetary policy?

  It regulates the money supply and sets interest rates
• What are the key pieces of data a monetary policy committee looks at?

  • Inflation rates
  • Employment levels
  • GDP growth
  • Consumer spending trends
• How does increasing the money supply affect AD?

  It can increase aggregate demand
• What data does the monetary policy committee analyze for decisions?

  • Inflation rates
  • Employment statistics
  • GDP growth
  • Consumer spending patterns
• What is a demand side policy?

  Government intervention to influence aggregate demand through fiscal and monetary policies to achieve macroeconomic objectives.
• What is the Monetary Policy Committee?

  A committee of 9 members that sets interest rates and monetary policy for the UK.
• When would a bank offer a higher interest rate?

  If the person has a bad credit score and a history of not paying back loans on time as they are a high risk.
• What is the transmission mechanism of monetary policy?

  The changes in aggregate demand, output and prices as a result of change in interest rates.
• How would reducing interest rates affect consumer spending?

  • It would increase as loans are cheaper so it‘s more affordable to purchase durable goods such as cars.
  • People on variable rate mortgages will have lower repayments and more discretionary income
• How would reducing interest rates affect investment?

  • Increase as loans are cheaper for businesses which increases the incentive to invest
  • UK exports are becoming more attractive so firms may need to invest to increase their capacity to meet the rising demand
• How would reducing interest rates affect the value of the pound?

  • Decrease as saving in British banks becomes less attractive which will lead to hot money outflows and decrease the demand for the pound, meaning the pound will depreciate
• What is contractionary monetary policy?

  Policy to decrease money supply and increase interest rates
• What is money supply?

  The total amount of spending power within an economy including cash and government bonds.
• What are the benefits of monetary policy?

  Flexibility and speed
• How does monetary policy compare to fiscal policy in terms of implementation speed?

  Monetary policy can be implemented quickly
• What can interest rates be adjusted for in monetary policy?

  To help fine-tune the monetary policy stance
• What is one effect of raising interest rates?

  Reduces aggregate demand
• How do lower interest rates affect economic growth?

  They promote growth by increasing borrowing
• How does independent decision-making in monetary policy differ from fiscal policy?

  Monetary policy avoids political delays
• What is a key advantage of independent monetary policy?

  Avoids political delays
• Why do central banks often operate independently?

  To focus on long-term economic stability
• What is a characteristic of predictable monetary policy?

  It provides clear objectives
• How does predictability in monetary policy benefit businesses?

  It allows for better planning and investment
• What is the impact of inflation on monetary policy?

  It can lead to adjustments in interest rates
• How do central banks use inflation targeting?

  To maintain price stability and predictability
• What is the relationship between inflation and interest rates?

  Higher inflation typically leads to higher interest rates
• What is a cost-effective aspect of monetary policy?

  Lower administrative costs compared to fiscal measures
• How does monetary policy compare to fiscal policy in terms of costs?

  Monetary policy has lower administrative costs
• What is the significance of adjusting interest rates in monetary policy?

  It influences economic activity and inflation
• What is the role of central banks in monetary policy?

  To manage inflation and stabilize the economy
• Why is it important for monetary policy to be transparent?

  It builds trust and predictability in the economy
• How does transparency in monetary policy affect consumer behavior?

  It encourages informed spending and investment decisions
• What is the primary goal of monetary policy?

  To achieve economic stability
• How does monetary policy aim to achieve its goals?

  By controlling inflation and managing interest rates
• What are the potential drawbacks of monetary policy?

  It may not address structural economic issues