Revision - monetary policy

What is monetary policy?

The control of the money supply and interest rates by a country's central bank to influence the economy.

What is the main tool of monetary policy in normal times?

Changing the policy interest rate.

What is expansionary monetary policy?

A policy where central banks cut interest rates to make borrowing cheaper, encouraging consumer spending and investment.

What effect does expansionary monetary policy have on currency value?

It lowers the return on domestic assets, causing the currency to depreciate, which makes exports cheaper.

What does contractionary monetary policy aim to achieve?

It raises interest rates to slow borrowing and spending, helping to cool inflation.

What does the term 'MPC' stand for in monetary policy?

MPC stands for marginal propensity to consume, which is how much people spend out of each extra dollar they receive.

What occurs when interest rates hit zero?

Traditionally, monetary policy loses power, leading central banks to turn to unconventional tools like Quantitative Easing (QE).

What is Quantitative Easing (QE)?

A monetary policy where the central bank makes large-scale asset purchases, creating digital money to buy government bonds, mortgage-backed securities, and corporate bonds.

What are the main goals of QE?

To lower long-term interest rates, increase asset prices, stimulate credit and spending, and prevent deflation.

What is Quantitative Tightening (QT)?

The process of shrinking the central bank's balance sheet by stopping reinvestment when bonds mature or actively selling assets.

Why was QE used during economic crises?

Because interest rates were at zero, inflation was too low, and economies needed stimulus.

What are some criticisms of QE?

It may inflate asset bubbles, widen inequality, be hard to unwind, and weaken the currency.

What happens during Quantitative Tightening?

It removes excess liquidity, allows interest rates to rise naturally, and reduces inflationary pressure.

What is the difference between QE and normal monetary policy?

Normal monetary policy adjusts the policy interest rate, while QE involves buying assets to stimulate the economy when rates are at the zero lower bound.