Chap 27

Question 1

Measures of the money supply

Answer 1

1. Narrow: Counts notes, coins and current accounts held at commercial banks
2. Broad: Notes, coins, current accounts & deposit accounts

Question 2

Define Monetary policy

Answer 2

Decisions on the money supply, the rate of interest and the exchange rate taken to influence aggregate demand.

(Influences the supply and/or price of money)

Question 3

How can you increase the money supply:

Answer 3

Increase the money supply:
1. Printing more money
2. Buying back government bonds (more money for CB to lend to their customers)
3. Encouraging commercial banks to lend more/ remove restrictions

If the money supply is increased, there is likely to be an increase in consumer spending and investment.
Such a rise in aggregate demand is likely to increase output.

Question 4

How does a rise in the rate of interest reduce aggregate demand?

Answer 4

1. Households or firms who have borrowed in the past will have to pay more interest on their loans. This will reduce the amount of money they have to spend.
2. Make it more expensive for households and firms to borrow to finance their spending. Borrowers will now have to pay more for any new loans they take out.
3. Increase the incentive to save. Households and firms will earn more than before from saving.
4. Encouraging a rise in the foreign exchange rate.

Question 5

Define Foreign exchange rate

Answer 5

the price of one currency in terms of another currency or currencies

Question 6

If a government wants to increase the economic growth rate and reduce unemployment

Answer 6

It may use expansionary monetary policy, reducing the rate of interest or increasing the money supply.

Question 7

Define Expansionary monetary policy

Answer 7

increases in the money supply and/ or the rate of interest designed to increase aggregate demand

Question 8

Define Contractionary monetary policy

Answer 8

cuts in the money supply or growth of the money supply and/or rises in the rate of interest designed to reduce aggregate demand.