Monetary Policy
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| show | banks and other financial institutions are known as financial intermediaries. they provide a link between those who wish to lend money and those who wish to borrow.
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| show | Banks are divided into
1. Retail banking - such as high street banks operating bank accounts for individuals
2. Wholesale banking - they receive large deposits from and make large loans to companies, banks and other financial institutions
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| show | Bank of England = UKs central bank. The European Central Banks is for those countries that use the Euro
Its function is to issue notes, act as bank, over see the activities of other financial institutions, operate gov monetary policy and exchange rate.
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| What is monetary policy? | show 🗑
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| Whats the the goals of monetary policy? | show 🗑
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| show | For most countries such as the UK the governments sets the monetary objectives and the central bank decided how to achieve them. For others the central banks may set and achieve the objectives or gov makes the objectives and directives the bank to achieve
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| What are the monetary policy objectives? | show 🗑
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| What are the functions of money? | show 🗑
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| show | Cash - notes/coins
Goods - e.g. fridges/cars/tomatoes does not count as money
Broader definition of money also included some bank accounts and financial assets
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| show | since 2004, specified target inflation rate of 2% per year as measured by the CPI
Although inflation rate is reviewed annually. Intention is to look at a low and stable rate over the long term
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| show | price stability is a key goal and major contributor to achieving other goals of gov policy. Price stability provide best environment for households and firms to make savings and investments.
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| Sometimes, the central banks has a trade off between what? | show 🗑
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| What are the two main benefits of adopting an inflation target? | show 🗑
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| How does monetary policy affect interest rates? | show 🗑
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| show | Monetary policy is referred to as either expansionary or contractionary
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| show | Increases the amount of money in the economy, more rapidly than usual. traditionally used to combat unemployment in a recession by lowering interest rates (shift supply curve left) in the hope easy credit will encourage businesses to expand
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| What is contractionary policy? | show 🗑
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| show | Increase money supply --> lower interest rates --> Higher investment spending increases income --> Higher consumer spending --> Increased AD (AD curve shift RIGHT)
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| How does Contractionary policy effect AD | show 🗑
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| show | 1. Open-market operation
2. Reserve ratio
3. Discount rate
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| What does Open market Operation do? | show 🗑
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| What does the Reserve Ratio do? | show 🗑
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| show | The interest rate the FRB charge on loans to commercial banks. Providing loans increases reserves of borrowing bank, enhancing ability to extend credit. For commercial banks, discount rate = cost of requiring those reserves.
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Created by:
Joph
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