Economics: Monetary Policy

What is Monetary Policy

Actions taken by the ECB that affect and influence Interest Rates, Availability of Credit and the Money Supply

How do they affect the Money Supply

They engage in open market operations by engaging in quantitative easing (buying and selling bonds)

How do they affect Interest Rates

They have the ability to increase and decrease interest rates in order to encourage/discourage saving and borrowing

How do they affect the Availability of Credit

They make rules regarding lending

What is the Role of the ECB

Maintain price stability (Inflation)

Implement Monetary Policy

Authorize the printing of bank notes

Manage the foreign reserves of the Eurozone

Insure the stability of financial markets across Europe

What is Inflation

The rise in the cost of goods and services over a period of time and the rate of which income loses its value

What are the causes of Inflation

Demand Pull - Rising incomes

Cost Push - Higher cost of production

Government induced

What are the effects of inflation

Purchasing power reduced

People on fixed income suffer the most

Investments fall

Reduces competition of exports

Future debt repayments reduced

What is Deflation

Occurs when there is a fall in the general levels of prices

Consumer spending falls

Employment falls

Government revenue falls

What are the benefits of the Euro

Encourages I.T

Transaction costs eliminated

Exchange risk eliminated

What are the challenges of the Euro

Monetary policy may not suit all countries

Loss of economic control