This document discusses the concepts of monetary policy, including bank rate, repo rate, reserve repo rate, and quantitative easing in the UK. It also explains the concept of demand elasticity and the relationship between price changes and demand for complementary goods.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
ONLINE EXAM
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
Table of Contents QUESTIONS.................................................................................................................................3 3...................................................................................................................................................3 5...................................................................................................................................................4 REFERENCES...............................................................................................................................1
QUESTIONS 3. Monetary policyare the policy which is formulated by the central government and control the money supply in the country. Central government influence the money supply in economy and cost to borrow it. UK central bank uses the main 2 monetary policy in the country which are interest Bank rate and Quantitative easing. Bank Rateis the rate which is the interest rate paid by commercial bank to central bank that hold the money. Bank changes there interest rate when the central bank changes the rate of lending the money.Higher the interest rate change by commercial bank when there is an inflation in the country (Auer and Papies, 2020). When the economy is at inflation point with high supply of money, central bank increase the bank rate in the country that result in expensive borrowing and leads to downfall in inflation and back to balance economy. Whereas, is the economy is faces the deflation in country with low supply of money, bank rate is charge low by the central bank and commercial bank which results in more borrowing and lending of money that brings the deflation period to balanced point in country. Repo rateis the rate which is given by the central bank to commercial bank when there is excess of money supply in market. Commercial banks lend their excess money to central bank and interest rate is given to commercial bank is high, If the country is facing huge deflation and crises in the economy, central bank give less interest rate on borrowing money to commercial bank (Gregor and Melecký, 2018). Reserve repo rateis the rate where the commercial bank deposit excess money to central bank where commercial bank is given interest on the money deposited. This is done when there is excess of money supply in the market and if the there is deflation in the market the rate is very low in market. Quantitative easingis the tool of central bank which used to inject money directly in the economy of UK. Money is either in the form of physical I.e. banknote or in the digital form I.e. in the money in bank account. This tool involves to create digital money and further used to purchase government bonds (Huh and Infante, 2017). This is also known as assets purchase. The tool is used to boost the economy by increase the spending and investment of people. This is done through large scale of purchasing of government bond with lower interest rate which result in low interest rate are offered on loans like mortgage loan or business loan which affect the
government bonds and interest rate in the economy. QE help people top borrow money from the government in cheaper rates for household and businesses and encourage their spending (Méndez-Carbajo and Asarta, 2017). Quantitative easing can bring balance in the economy by boosting the wide range of financial assets price in country. 5. a) Elasticity of demand measures the responsiveness of demand of a particular good or service due to corresponding change in price of that good or service. In case of cross – price elasticity of demand which is a measure of responsiveness in case of goods which are related with each other in some sense like either they may be substitutes or complementary of each other (Méndez- Carbajo and Asarta,2017). Here it is given that the cross – price elasticity of demand between peanut butter and grape jelly is negative which indicate that these two goods are related to each other and there is a negative relationship lies between the two. Such negative relationship indicate that when price of peanut butter will change then there will be negative impact on the demand for grape jelly. For example, if the price will rise of peanut butter then there will be decrease in demand of grape jelly (Gostkowski, 2018). Due to this negative relationship between both these goods, these goods are considered as complementary goods. The reason behind such consideration is that these goods are pair goods and usually consumed together. There individual relevancy decreases due to the absence of another. As we know that when the price of peanut butter increase, the customers are unable to buy them and accordingly this change will impact the demand for grape jelly in the sense that it will be decrease because as consumers will not buy expensive peanut butter. b) Here it is given that the price of peanut butter is increasing, so the effect on demand of both the peanut butter and grape jelly would be as follows: If the price of peanut butter will increase then as per the law of demand which states that there is an inverse relationship between price and demand of the goods and services, which means that when price of the good increases this will decrease the demand of the good and opposite is the case when price of the goods service falls (Auer and Papies, 2020). So, in case of rising price of peanut butter, there will be decrease in demand for peanut butter. This is due to the fact that other things remains constant which includes the income of the consumer, so the
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
constancy in income will reduce the scope for consumers to buy peanut butter at its increased price (Ghoddusi and Roy, 2018). The another effect which will be reflected due to increase in price of peanut butter is on the demand of its related good which can either be its substitute or complementary. If it is substitute then the demand will increase and if it is complementary then the demand will decrease. Here it is given that the cross – price elasticity of demand between both of these productsisnegative,sothisindicatethatthesegoodsarecomplementary.Incaseof complementary goods, when price of a particular good rises then the demand for goods which are complementary to it will be decreased. Thus, the effect of price rise of peanut butter will result in reduction in demand of both peanut butter and its complementary grape jelly.
REFERENCES Books and journals Auer, J. and Papies, D., 2020. Cross-price elasticities and their determinants: A meta-analysis and new empirical generalizations.Journal of the Academy of Marketing Science, pp.1- 22. Ghoddusi, H. and Roy, M., 2018. Income Elasticity of Demand Versus Income Elasticity of Consumption.Available at SSRN 3122844. Gostkowski, M., 2018. Elasticity of consumer demand: estimation using a quadratic almost ideal demand system.Econometrics,22(1), pp.68-78. Gregor, J. and Melecký, M., 2018. The pass-through of monetary policy rate to lending rates: The role of macro-financial factors.Economic Modelling,73. pp.71-88. Huh, Y. and Infante, S., 2018. Bond market intermediation and the role of repo.Available at SSRN 2773678. Lee, J., 2017. Collateral circulation and repo spreads.Available at SSRN 2548209. Méndez-Carbajo, D. and Asarta, C. J., 2017. Using FRED data to teach price elasticity of demand.The Journal of Economic Education,48(3), pp.176-185. 1