Revision - monetary policies 2

What are the two main types of assets considered in the simplified asset choice of monetary policy?

Money (medium of exchange) and Bonds (which earn higher interest returns).

How do bond prices relate to interest rates?

Bond prices negatively correlate with interest rates; rising interest rates decrease bond prices.

What happens during excess demand for money in the money market?

People sell bonds, which lowers bond prices and raises interest rates.

What occurs when there is excess supply of money?

People buy bonds, raising bond prices and lowering interest rates.

Define monetary equilibrium.

It occurs when money and bond stocks are held at current interest rates.

What is the nominal rate of interest's influence in monetary policy?

It influences equilibrium interest rates across different money quantities.

What is the wealth effect in the context of interest rates?

Changes in asset valuations that affect consumption patterns.

How do interest rates influence investment expenditure?

Higher interest rates lower the profitability of investment projects.

What is an inflationary gap?

It occurs when actual GDP exceeds potential output, causing price level increases.

What effect do lower interest rates generally have on aggregate demand?

They lead to higher investment, shifting aggregate demand to the right and potentially increasing prices.

What is the old monetarist rule regarding time lags for output and price impacts?

One year for output impact and two years for price impacts.

What is Quantitative Easing (QE)?

A monetary policy where central banks purchase large amounts of assets to increase the money supply.

What is primarily affected by Quantitative Easing?

Long-term interest rates tend to lower, which can boost investment and asset prices.

What is a limitation of Bank Lending Channel in the context of QE?

Households and firms do not gain a direct increase in cash from QE, resulting in limited lending growth.

What are the main challenges facing business investment recovery post-QE?

Lower yields and asset prices along with minimal exchange rate effects due to global downturn.

What is Quantitative Tightening (QT)?

A process where central banks unwind QE, requiring careful handling to avoid market shocks.

What is the relationship between QE/QT and modern monetary policy?

They are pivotal strategies to influence economic activity and stabilize markets.