Impact of Monetary Policy on Economy

These flashcards cover key concepts related to monetary policy, interest rates, and their effects on the economy and business profitability.

What is the effect of increasing money supply through government bonds on the economy?

It injects more money into the economy, making it easier for banks to lend and potentially lowering long-term interest rates.

How does a decrease in interest rates affect the exchange rate?

It can lead to domestic currency depreciation, making exports cheaper and imports more expensive.

What is contractionary monetary policy?

It involves raising interest rates to decrease demand, increasing the cost of borrowing, and discouraging consumer spending.

What is quantitative tightening?

It is the reverse of quantitative easing, where a bank reduces its asset holdings, taking money out of the economy.

What happens to the exchange rate during quantitative tightening?

Interest rates tend to increase, leading to currency appreciation, making exports more expensive and imports cheaper.

How do changing interest rates impact a business's profit margins?

Higher interest rates can squeeze profit margins as borrowing costs increase.

What happens to the value of the pound if interest rates fall?

The value of the pound typically decreases.

Why would a weak pound deter international investors?

A weak pound results in a lower return on investment (ROI) for international investors.