Monetary policy

Extract B (lines 6–7) states: ‘Some analysts hope that, before long, the currency will start to appreciate which could help Norway reduce inflation.’

With the help of a suitable diagram, explain how an appreciation of the krone could help Norway reduce inflation.

Extract C (lines 4–5) states ‘Energy and food bills had risen dramatically due to shocks to the economy, such as labour shortages, a depreciation of the pound…’

With the help of a diagram, explain how a depreciation of the pound may cause inflation.

A central bank has raised interest rates as part of monetary policy.

Which one of the following policy objectives is this most likely to assist the government in achieving?

Explain how the data in Extract D (Figures 3 and 4) show why the South Korean central bank may have been considering a further cut in its base rate of interest.

Evaluate the possible impact on the cost of living and the standard of living in the UK of a sustained rise in the value of the pound sterling against other currencies, such as the euro and the US dollar.

Assess policies which can be used to reduce cyclical instability in the UK.

The Bank of England’s Monetary Policy Committee increases Bank Rate to reduce the risk of an increase in inflationary pressure in the economy. All other things being equal, which one of the following is most likely to result from the policy change?

Explain how an appreciation of its currency is likely to affect a country’s rate of economic growth.

All other things being equal, in which one of the following circumstances is the Bank of England most likely to raise Bank Rate to maintain financial stability?

Assess the view that a depreciation of the pound against other currencies is likely to improve the UK’s macroeconomic performance.

Explain how the monetary policy transmission mechanism works when the Monetary Policy Committee (MPC) raises Bank Rate.

The table below shows different combinations of changes in the rate of interest and the government’s budget position. The economy has a negative output gap. All other things being equal, which one of the combinations of policies, A, B, C or D, is most likely to

Despite its central bank operating a policy of quantitative easing for several years, an economy has rising unemployment and a rate of inflation significantly below the target rate set by the government. All other things being equal, which one of the following actions is the central bank most likely to take in order to meet the target for inflation?

Extract F (lines 10–12) states ‘The Austrian economist, Friedrich Hayek, highlighted artificially low interest rates and excessive credit creation as being the main causes of cyclical instability.’

Using the data in the extracts and your knowledge of economics, evaluate the view that maintaining low interest rates for a sustained period of time may be damaging to the UK’s macroeconomic stability.

The diagram below shows two aggregate demand (AD) curves, two short-run aggregate supply (SRAS) curves, and the long-run aggregate supply (LRAS) curve for an economy.

The increase in the price level from P₁ to P₂ raises the rate of inflation above the target rate set by the government. In an attempt to bring inflation back to its target rate, the central bank announces a change in interest rates. Other things being equal, this is most

Extract F (lines 19–20) states ‘What is not clear is what should be done if low inflation turns to bad deflation.’

Using the data in the extracts and your knowledge of economics, evaluate the view that monetary policy is the most effective way of tackling deflation in developed economies such as the UK and Japan.