Monetary Policy

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What is the monetary policy and money supply.
The use of interest rates and the money supply to control aggregate demand in the economy. Is the amount of money circulating in the economy.
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What are interest rates and reasons for different onces.
The price paid to lenders for borrowed money (Price of money). Difference banks charge different rates since they compete with each other. Rates are higher if money is borrowed without security.
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Role of Central banks in setting interest rates
Implementation of the government’s monetary policy and regulating the bank system. Acting as last resort lender to commercial banks. Controlling inflation and stabilising a nation’s currency. Setting interest rates
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Impact of MP on Inflation
Raise the interest rate, to drop the rate of borrowing. And money supply grows less quickly, to help aggregate demand in the economy.
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Impact of MP on Unemployment
Lower interest rates to reduce unemployment. Increase in demand for loans and firm and household spending would increase. Increasing aggregate demand and firms will respond by increasing output. Needing staff
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Impact of MP on Economic Growth
May be used to get an economy out of recession.Lower interest rates to stimulate economic growth/activity
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Impact of MP on The Current Balance
Reduce a deficit: Rise in interest rates, to lower aggregate demand and reduce spending on imports.
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What does the overall effect on Current balance depend on (MP)
Income elasticity of imports. Strength of the link between interest rates and exchange rates. Price elasticity of demand for imports and exports
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How interest rate changes affect consumers when it falls
Consumers: When IR (interest rate) falls, demand for loans from households will rise. Consumers are likely to borrow money to buy goods like cars, furniture etc. because borrowing is cheaper.
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How interest rate changes affect consumers when it rises
When IR rises, consumers try to reduce borrowing cause it’s expensive. As a result, demand for goods using borrowed money will fall. Also, mortgage payments increase; therefore households will have less disposable income. And reduce their saving.
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How interest rate changes affect firms when it falls
When IR falls, interest payments on current borrowings will hall. Will help boost their profits because costs will be lower. Lower IR’s are also likely to raise business confidence and stimulate more investment.
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How interest rate changes affect firms when it rises
Higher IR’s will raise costs, lower profits, reduce business condiffedence, and make entrepreneurs more cautious.
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What is quantitave easing
the buying of financial assets like buildings, from commercial banks. Which results in a flow of money from the central bank to commercial banks.
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What is a possible problem to quantitave easing
Can be inflationary because the money used by the government does not exist; it is created electronically. The government buys financial assets from commercial banks and increases the cash balances in their accounts without actually giving them any cash.
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Other cards in this set

Card 2

Front

What are interest rates and reasons for different onces.

Back

The price paid to lenders for borrowed money (Price of money). Difference banks charge different rates since they compete with each other. Rates are higher if money is borrowed without security.

Card 3

Front

Role of Central banks in setting interest rates

Back

Preview of the front of card 3

Card 4

Front

Impact of MP on Inflation

Back

Preview of the front of card 4

Card 5

Front

Impact of MP on Unemployment

Back

Preview of the front of card 5
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