What is monetary policy?
Enjoying Flashcards?
Tell us what you think
What is monetary policy?
Monetary policy involves adjusting the money supply to influence total (aggregate) demand in the economy.
What does the term money supply mean?
The money supply is the amount of money in an economy at any given moment in time, consisting of coins, banknotes, bank deposits, and central bank reserves.
Which institution is responsible for setting monetary policy?
The central bank in each economy is responsible for setting monetary policy.
What is the main instrument of monetary policy?
Interest rates are the main instrument of monetary policy, where incremental adjustments are made to influence the economy.
Define the term quantitative easing (QE).
Quantitative easing (QE) is an instrument of monetary policy where the central bank creates new money and uses it to buy assets like bonds, injecting money into the economy.
What are the tools of expansionary monetary policy?
Expansionary monetary policy aims to generate further economic growth through measures like:
Reducing interest rates
Increasing QE
Depreciating the exchange rate so as to increase exports
True or False?
Contractionary monetary policy includes decreasing interest rates, decreasing/stopping QE, or appreciating the exchange rate.
False.
Contractionary monetary policy includes increasing interest rates, decreasing/stopping QE, or appreciating the exchange rate.
True or False?
Monetary policy can influence components of total demand.
True.
Changes to monetary policy can influence components of total demand, such as household consumption, firm investment, exports, and imports.
What is the formula for calculating total demand?
Formula.
Total (aggregate) demand = household consumption (C) + firm investment (I) + government spending (G) + exports (X) - imports (M)
How can increasing interest rates impact the economy?
Increasing interest rates can:
Reduce consumption and investment
Appreciate the exchange rate (making exports more expensive and imports cheaper)
Slow economic growth
Ease inflation
Possibly increase unemployment
State a strength of monetary policy.
A strength of monetary policy is that the central bank operates independently of the government and can consider the long-term outlook.