32. Monetary Policy

Question 1

What is monetary Policy?

Answer 1

Use of interest Rates and the money supply to control aggregate demand in the economy

Question 2

The Role of Central Banks in setting Interest Rates

Answer 2

1. Implementing the government’s monetary policy and regulating the banking system.
2. Acting as a lender of last resort to commercial banks.
3. Controlling inflation and stabilising a nation’s currency.
4. Setting interest rates

Question 3

Whats the rate of interest set by central banks?

Answer 3

Base Rate

Question 4

Impact of Interest Rate on Inflation

Answer 4

To reduce inflation is to slow down the speed at which the money supply is growing. This is likely to raise the interest rate. When interest rates are higher, borrowing is likely to fall, and the money supply grows less quickly. This will help to reduce AD in the economy and limit price increases

Question 5

Impact of Interest Rate on Unemployment

Answer 5

A government might use lower interest rates to reduce unemployment. If interest rates were cut, this would increase demand for loans. As a result, spending by firms and households rises. This would increase AD, and firms may respond by producing more goods and services, needing them to recruit more staff.

Question 6

Quantitative easing

Answer 6

Involves central banks buying assets such as government bonds from commercial banks