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Monetary policy revision questions
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Questions and answers on monetary policy.
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Monetary policy1) What are interest rates?
Cost of borrowing and reward of saving. Interest rates affect the savings and spending of consumers.
Higher interest rates cause more savings, lower interest rates cause more spending.
2) Who are the Bank of England and what do they do?
The Bank of England set interest rates and control inflation.
3) How do interest rates influence inflation?
They discourage spending therefore lower inflation.
4) How do interest rates influence the exchange rate?
Low interest rates make foreign investors more likely to invest or borrow. Increase in interest rates
lead to an increase in the exchange rate.
5) Why is there such a big time lag with monetary policy?
There is a long logic chain and a lot of steps which can go wrong along the way.
6) Why don’t they do negative interest rates?
The lender would lose money. They are impractical and unstable. Doesn’t work because it’s such an
extreme policy.
7) Why has having very low interest rates not seen a big increase in AD in recent years?
Other factors such as recessions have impacted AD more which fiscal policy can be more effective at
solving. People were reluctant to borrow and loan as they would have done before the financial
crisis. Lower consumer confidence.
8) What does QE do?
Quantitative easing creates more money which increases liquidity and leads to more spending and
aggregate demand.
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