Monetary Policy

Question 1

What is the purpose of monetary policy?

Answer 1

To control the amount of money flowing around the circular flow.

Question 2

Why do we want to control the amount of money within the circular flow?

Answer 2

Because too much money floating around is inflationary.

Question 3

What are the components of monetary policy?

Answer 3

Interest rates & credit availability.

Question 4

What is quantitative easing?

Answer 4

Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds.

Question 5

DISTINGUISH between monetary policy and fiscal policy (6 MARKS)

Answer 5

• Fiscal policy uses taxation and government spending in order to influence aggregate demand.
• Monetary policy uses interest and credit availability in order to control the amount of money flowing around the circular flow.
• However, fiscal policy is controlled by the government; whereas, monetary policy is controlled by the MPC.

Question 6

Who are the MPC?

Answer 6

The bank of England monetary policy committee.