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what is the monetary policy?
A policy that aims to control the total supply of money in the economy to try to achieve the government's economic objectives, in particular price stability
what does monetary policy use in particular to influence economy?
interest rates and it attempts to limit total demand
What is quantitative easing?
a monetary policy tool that central banks use to increase the money supply and stimulate the economy
How does quantitative easing work?
Central bank (Bank of England) creates money electronically (like printing money) and uses these extra cash reserves to buy various securities (e.g government and corporate bonds)
what are government bonds?
a type of debt-based investment, where you loan money to a government in return for an agreed rate of interest
how does quantitative easing help economy?
encourages consumption and investment
how can monetary policy be used to influence economic growth?
- interest rates can be lowered, so more people borrowing and less saving, more spending, greater AD and hence economic growth
- Uk exchange rate falls as less people from foreign areas are saving in UK banks, so less demand for pounds, this makes exports cheaper and imports dearer, this increases exports, AD increases, higher growth
how can monetary policy be used to influence low unemployment?
- lower interest rates, more borrowing and spending, greater output, more employment
- lower interest rate, more borrowing and investment, greater expansions, more workers required
- lower exchange rate as less foreigners saving in UK banks, this makes exports higher in demand, this increases output and hence more workers are needed
how can monetary policy be used to influence price stability?
- interest rates increased
- more saving less borrowing, less spending, lower AD, lower inflation
- less borrowing, less investment, less costs as when doesn't borrow they don't have interest to pay, so less cost push inflation
- higher exchange rate, exports become expensive, less demand for Uk goods, lower inflation
how can monetary policy influence a healthier balance of payments?
- higher interest
- more saving lower borrowing, less demand, less imports, higher net export
how does monetary policy affect consumer spending?
- if interest rates fall, , more people spend as reward for saving decreases, opportunity cost of spending which is saving
-if interest rates fall, cost of borrowing and reward for saving decreases, more people spend however depends on the size of change of interest rates, if only little then people mays till opt for saving
- if interest rates fall, retired people who relied on income from savings will have a lower income so will spend less
- if interest rates fall, mortgages interest also falls, most people in uk have mortgages, so more people have higher disposable income, higher spending
how does monetary policy affect borrowing?
- lower interest rates, lower risk of borrowing, more borrowing, higher spending
- lower interest rates, if consumer confidence in economy is low, people may still borrow less
- lower interest rates, lower cost of mortgages, more mortgages and can pay them off quicker
how does monetary policy affect saving?
- lower interest rates, lower reward for saving, decreased saving
- lower interest rates, lower reward for saving, those who rely on savings as income spend less
- lower interest rates, if price level falls, people still may save as they would be able to afford the more cheap goods and services
- if real interest rates still exceeds rate of inflation, more people may still save if interest rates fall
how does monetary policy affect investment?
-Expected returns from the investment: if these are greater than the rate of interest then firms will invest.
- State of the economy: when an economy is doing poorly this will deter firms from investing whatever the rate of interest.
- Competitors: when competitors are investing it is essential to try to keep up with them by also investing as a firm cannot afford to fall behind despite the change in the interest rate.
- Taxation on profits: high taxes will deter firms from investment.