Economic Policy

What is monetary policy?

Policies that manipulate the money supply interest rates (base rates official rather and bank rate)and exchange rate in order to achieve monetary objectives (e.g the inflation target).

Who is in control of the monetary policy’s?

The Bank of England.

What’s the Bank of Englands aim?

‘To promote the good of the people of the United Kingdom by maintaining monetary and financial staility’.

What is the money supply?

The entire stock og money and liquid instruments at any point in time.

What is the Bank Rate?

The rate the BOE charges other banks on 24 hour loans.

What’s a current account deficit?

Occurs when the value of imports exceeds the value of exports

What are the Bank of Englands two main monetary policy tools?

The bank rate (interest charged for bank to borrow money) and quantitative easing (create money digitally to buy cooperate and government bonds).

What are expansionary monetary policy’s?

Policy’s which increase AD. Interest rates official rather cuts will go through the monetary policy transmission mechanism: lower credit card interest rates and so lowers consumer saving (^ C) and increases borrowing (higher MPC) (^C) lowers mortgage rates (more disposable income, ^MPC)(^C), lowers mortgage rates interest rates on business loans (^I), weaker exchange rate (hot money outflows)(higher supply of the £ depreciates its value resulting in <exports)

How does an expansionary monetary policy affect LRAS?

If interest rates come down, banks borrow more (lower cost of borrowing) and so increase investment (improve the quantity and/or quality of capital and/or the productive efficiency), increasing the economy’s productive potential. However this is not the main intention but is rather a side effect.

What are issues that may result from an expansionary monetary policy?

It may cause demand pull inflation, widen the current account deficit (spending more on imports),liquidity trap- interest rates have a lower bound (Keynsian), negative impact on saves (especially if inflation is high, potential negative real return on savings additionally if they reduce savings too much they are at risk in case somethings happens in the future), time lags (transmission mechanism, 18-24 months)

What is the effectiveness of expansionary monetary policy?

The effectiveness depends on the size of the output gap (if there is only a small negative output gap there will not be much growth but instead high demand pull inflation conversely, if there is a larger output gap, RNO will increase by a great amount while interest rates will remain as a similar/ the same level), effectiveness of increasing AD is depends upon the level of business and consumer confidence (^confidence, ^ spending and investment), depends on banks willingness to pass on lower interest rates, the size of the rate cut

What are contractionary monetary policy’s?

Policy’s which reduce AD primarily via higher interest rates.

What effects to contractionary monetary policy’s have?

Lowers demand pull inflation, discourages household and cooperate debt (reduces the chance of bank failure and systemic risk and so reducing the chance of recession), promotes more sustainable borrowing and lending (reduces the chance of bubbles/ unsustainable growth and so less chance of recessions), encourages saving and benefits saves (e.g pensioners)