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Terms in this set (15)
What's monetary policy?
-Use of interest rates and money supply controls by central banks to control the level of AD in an economy.
-As it influences the decisions that consumer make about how much then save, borrow or spend
What's expansionary monetary policy?
Decreases interest rates, which increases AD, decreases incentive to save and increases incentive to borrow
Effects of expansionary monetary policy?
- consumers borrow more to spend
- mortgage repayments down
- firms borrow more to invest
- demand for currency down
What's contractionary monetary policy?
- Increases interest rates, which increases AD
- increases incentive to save and decrease incentive to borrow
Household market + prices affects by monetary policy?
IR up increases costs of mortgages
- reduces the demand for most type of house
Effective disposable incomes of mortgage payers in monetary policy?
IR up, income of mortgage earners will fall, leads to decline in purchasing power
Credit demand effected by monetary policy?
IR up, cost of debt on credit cards up, income up, AD decrease
Redistribution of income for savers and borrows by monetary policy?
IR fall, borrowers win, lenders loss, income distributed back to borrows as pay less IR, lenders earn less back from IR
Investment &stock building by monetary policy?
IR up, firm confidence down, investment down
How does monetary policy effective in recession to household and firms?
- Firms and consumers worry about economy recession
- IR cut boost confidence, reassures public that bank aware of the economic slump.
Advantages of monetary policy
- central banks have independence, politicians unable to influence
- i.r. can be adjusted regularly
- small time lags [especially w/ countries using credit cards - i.r. up can affect consumption immediately]
- c.banks change i.r. without approval needed [unlike fiscal policy]
Disadvantages of monetary policy
- consumption/ investment can be i.r inelastic [no respond]
- conflict gov objective, cause high inflation, falling e.growth
- delays occurs when countries use less c.cards
- limit effect when countries in recession
Evaluation on time lags?
- MPC unable to know where economy is at due to time lags.
- Time lags on increase IR and effect on economy, as it goes through monetary transmission mechanism before affect AD
- makes it hard to make the correct monetary policy decision
Evaluation on the depth of recession?
- if recession is high, monetary policy can't boost AD alone
- whether IR is set by gov. or independent central banks
Examples of monetary policy?
- UK I.R at 0.5% in hope to boost demand
-didn't work, no more cuts to IR
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