9708 · 5.3
Monetary policy flashcards
Revision flashcards for Cambridge 9708 Monetary policy (syllabus 5.3). Flip, recall, then mark a real past-paper question.
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What is monetary policy?
Central bank management of interest rates and money supply to influence AD and achieve price stability and other macro objectives.
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Expansionary monetary policy?
Cut interest rates (or increase money supply) to stimulate C, I, and net exports — AD shifts right.
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Interest rate transmission to consumption?
Lower r → cheaper borrowing and lower return on saving → households spend more (C rises) → AD increases.
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Exchange rate channel?
Lower r → capital outflows → currency depreciates → exports cheaper abroad, imports dearer → (X−M) rises → AD increases.
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Contractionary monetary policy?
Raise interest rates to reduce C and I, dampen AD, and control demand-pull inflation.
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Key limitations of monetary policy?
Time lags, zero lower bound (liquidity trap), inelastic investment in recession, and possible conflict with exchange rate stability.
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What is Monetary Policy?
Actions by a central bank to manage the money supply and credit conditions to influence economic activity, primarily to control inflation and support economic growth.
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What is the monetary policy transmission mechanism?
The process through which a change in the policy interest rate works its way through the economy to affect aggregate demand, output, and inflation. It includes channels like market rates, asset prices, and the exchange rate.
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Define 'Hot Money'.
Capital that is frequently transferred between financial institutions in different countries to take advantage of the highest short-term interest rates. These flows can cause significant fluctuations in a country's exchange rate.
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What is expansionary (or loose) monetary policy?
A policy to increase aggregate demand, usually during a recession. It involves lowering interest rates to encourage consumption and investment, shifting the AD curve to the right.
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What is Quantitative Easing (QE)?
An unconventional monetary policy where the central bank purchases long-term securities or other assets from the open market in order to increase the money supply and encourage lending and investment when standard interest rate cuts are ineffective.