Monetary Policy SAQ

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What institution controls monetary policy in developed economies?

In developed economies, monetary policy is controlled by a central bank, not a government.

Name the central bank of the US.

The central bank of the US is the Federal Reserve (The Fed).

What is quantitative easing (QE)?

Quantitative easing (QE) is when a central bank buys financial assets from commercial banks with new money that the central bank has created.

What is one economic implication of quantitative easing?

One economic implication of quantitative easing is increased borrowing. Signup and view all the answers

How does adjusting interest rates affect the rate of inflation?

Adjusting interest rates influences the cost of credit and economic activity, which in turn affects the rate of inflation. Signup and view all the answers

What happens when a central bank implements a high interest rate during an inflationary period?

A high interest rate during an inflationary period encourages savings and helps to reduce inflation. Signup and view all the answers

How can a central bank stimulate economic activity during an economic downturn?

A central bank can stimulate economic activity during an economic downturn by reducing the reserve ratio, allowing banks to lend more. Signup and view all the answers

What are two benefits of the eurozone having a single currency?

Two benefits are the elimination of exchange rate risk and the elimination of transaction costs. Signup and view all the answers

What challenge does the eurozone face with a single monetary policy

The challenge is that the single monetary policy might not suit all individual economies within the eurozone, such as Ireland. Signup and view all the answers

What was a major change for the Irish Central Bank when Ireland adopted the euro?

The major change was the loss of control over monetary policy, which was handed over to the European Central Bank (ECB). Signup and view all the answers

What is one of the primary roles of the ECB?

One of the primary roles of the ECB is to ensure price stability, aiming for an inflation rate of 2% over the medium term. Signup and view all the answers

How does the ECB influence the price of the euro in terms of other currencies?

The ECB manages the external foreign currency reserves of the eurozone and conducts foreign exchange operations. Signup and view all the answers

What does the ECB do to ensure the stability of the financial system across the eurozone?

The ECB ensures the stability, safety, and soundness of the financial system across the eurozone. Signup and view all the answers

What action might the ECB take during a recession to stimulate the economy?

During a recession, the ECB might reduce its key interest rate to lower the cost of credit and increase spending and investment. Signup and view all the answers

How can the ECB increase money supply during a recession?

The ECB can increase money supply by engaging in a quantitative easing program. Signup and view all the answers

What might the ECB do to reduce credit availability during significant economic growth?

The ECB might increase the reserve requirements of banks to reduce credit availability during significant economic growth. Signup and view all the answers

What is the effect of increasing the key interest rate during significant economic growth?

Increasing the key interest rate during significant economic growth raises the cost of credit, decreases borrowing, increases saving, and reduces spending and investment. Signup and view all the answers

What is one impact of quantitative tightening by the ECB?

One impact of quantitative tightening by the ECB is a reduction in the money supply, leading to decreased lending by banks and reduced demand for goods and services. Signup and view all the answers

How many countries are currently in the eurozone?

There are currently 19 countries in the eurozone. Signup and view all the answers

What happens to transaction costs for firms within the eurozone due to the single currency?

Transaction costs are eliminated for firms within the eurozone due to the single currency. Signup and view all the answers