To influence 'AD' (it is a demand-side policy), to either stabilise output and unemployment, or to stabilise price level.
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What does a Monetary Policy involve? (P204)
The controlling of the macroeconomy through changes in monetary variables, such as the money supply, interest rates or the exchange rate.
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Who sets monetary policies? (P204)
The Monetary Policy Committee (MPC), part of the Bank of England.
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What are the 'real interest rates'? (P204)
This is 'the money rate of interest' - 'the rate of inflation'.
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What are fan diagrams? (P205)
As changes in the Monetary Policy have a lag time, of around 2 years, a forecast has to be made of the effects. The diagrams shows all the possible outcomes, then the most probable (the middle of the fan) is chosen as the expected outcome.
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What likely affect will a cut in interest rates have on the UK's 'AD'? (P206)
A cut in interest rates will mean less foreign investors hold their money in the UK. This will weaken the pound, and cause AD to rise (as a weak pound makes exports more competitive, and imports seem more expensive).
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What is the 'repo rate'? (P209)
This is the rate set by the MPC that it changes banks to borrow short-term loans. The banks then base their interest rates, to borrows, on it.
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What is the likely affect of increasing the UK's money supply? (P212)
An increase in the money supply will give consumers more spending power. This will increase 'AD'
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What is 'hot money'? (P213)
Money that is liable to rapid transfer from one country to another. Currency is exchanged of 'FOREX'. If interest rates are high, hot money will flow into the UK, as firms look for the highest return on savings. This makes the pound stronger.
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What are advantages on a strong pound? (P213)
Cheaper imports. Lower production costs (as imported raw materials are cheaper). Lower inflation. Interest rates may be lowered.
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What are disadvantages on a strong pound? (P214)
Increased in trade deficit. Slower economic growth. Lower confidence for investment (as 'AD' is falling).
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Other cards in this set
Card 2
Front
What does a Monetary Policy involve? (P204)
Back
The controlling of the macroeconomy through changes in monetary variables, such as the money supply, interest rates or the exchange rate.
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