Monetary Policy

Monetary Policy relates to decisions about...

• Interest rates & taxes

• Taxes & government spending

• Interest rates & the money supply

• Government spending & the money supply

Who sets interest rates in the UK?

• The government

• The Monetary Policy Committee

• The Queen

• Martin Lewis

What is the MPC's official target when setting interest rates?

• To have no inflation in the economy

• To have 2% inflation in the economy

• To have 5% inflation in the economy

• To have 10% inflation in the economy

If the MPC fail to meet the 2% inflation target, they must...

• Write a letter to the Queen to apologise

• Write a letter to the Chancellor of the Exchequer

• Write a letter to all UK banks

• Write a letter to all UK firms

When interest rates are cut, which of the following should happen (in theory)? Tick all the correct answers...

• Households spend less as there is a greater incentive to save.

• Firms spend more as it is cheaper to take out a bank loan.

• Households spend more as their monthly mortgage payments are lower (variable rate mortgages).

• Households spend more as there is less incentive to save.

What is the process of injecting more money into the economy commonly known as?

• Qualitative easing

• Quantitative easing

• Supply Side Policy

• A tariff

According to Fisher's Quantity Theory of Money...

• When additional money is injected into the economy, prices are likely to fall

• When additional money is injected into the economy, prices are unlikely to rise

• When additional money is injected into the economy, prices are likely to rise three times as much

• When additional money is injected into the economy, prices are likely to rise by the same proportion

Which of the following is the correct formula for Fisher's Quantity Theory of Money

• M x V = P x Y

• AD = C + I + G + (X -M)

• SPICED

• E = MC²

According to Fisher's Quantity Theory of Money...if the Money Supply is £20m, Velocity of Circulation is 4, Real GDP is £10m, then the average Price Level is...

• £2

• £4

• £6

• £8

When interest rates are cut, consumption and investment should both rise (in theory). However, why might they not rise? Tick all the correct answers...

• Because of a lack of confidence, causing households & firms to save / delay purchases

• Because average incomes went up at the same time that interest rates were cut

• Because income tax rates were increased at the same time that interest rates were cut

• Because the price level rose at the same time that interest rates were cut