Monetary Policy

Question 1

Monetary policy definition

Answer 1

Measures involving changing the money supply and interest rates to achieve macroeconomic objectives

Question 2

Contractionary monetary policy (6)

Answer 2

• Decrease money supply
• Less money available in the economy
• Spending by firms and households falls: AD falls
• Firms lower prices to attract workers
• Inflation rate falls
• Hence low and stable inflation rate achieved

Question 3

Expansionary monetary policy (6)

Answer 3

• Increase money supply
• More money available in the economy
• More spending in firms and households: more AD
• More prod. by firms
• Output rises –> economic growth rises
• Firms hire more workers: unemployment rate falls