Questions and Answers
What is the primary goal of central banks when adjusting interest rates to control the rate of inflation?
What would a central bank do to discourage borrowing and reduce inflation?
What is the effect of quantitative easing on the economy?
What happens to the external value of the currency when a central bank implements quantitative easing?
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During an inflationary period, what would a central bank do to encourage savings?
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What is the effect of decreasing the reserve ratio on the economy?
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What is the primary tool used by central banks to adjust the money supply?
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What is the relationship between interest rates and the incentive to save?
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During a period of deflation, what would a central bank do to encourage consumers to spend?
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What is the ultimate goal of central banks when using monetary policy to control inflation?
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Study Notes
Monetary Policy to Control Inflation
Adjusting Interest Rates
- Central banks adjust interest rates to influence economic activity and inflation
- Increasing interest rates discourages borrowing, leading to a fall in demand and inflation
- Decreasing interest rates encourages borrowing, stimulating economic activity and inflation
Effect on Savings
- Adjusting interest rates influences the incentive to save
- High interest rates during inflationary periods encourage savings
- Low interest rates during deflationary periods discourage savings and encourage spending
Quantitative Easing (QE)
- QE occurs when a central bank buys financial assets from commercial banks with newly created money
- QE increases the money supply, leading to:
- Increased borrowing
- Increased demand and spending
- Lower interest rates
- Increased economic activity
- Depreciation in the external value of the currency
Credit Availability
- Central banks can alter credit availability by adjusting the reserve ratio
- Reducing the reserve ratio during economic downturns:
- Allows banks to lend more
- Stimulates economic activity
- Results in inflation
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Description
Learn how central banks adjust interest rates to control inflation and its effects on borrowing, economic activity, and savings.
