Monetary Policy SAQ

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<p>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.</p> Signup and view all the answers

<p>There are currently 19 countries in the eurozone.</p> Signup and view all the answers

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