2.6.2 - demand side policies Flashcards
What is the aim of the Monetary Policy Committee?
they set monetary policy in order to meet the 2% CPI inflation target rate, to sustain growth and employment
What are the 3 ways the MPC can influence AD?
- interest rates
- the money supply
- the exchange rate
what is the main method used to control the money supply?
quantitative easing
What are the aims of quantitative easing?
It aims to support the economy by encouraging people to save less and spend more.
How does quantitative easing work?
The Bank of England can create new money electronically, most of this money is used to buy government bonds. Buying lots of bonds pushes the price up, interest rates on loans are affected by the price of bonds. If prices go up, interest rates should go down - easier to borrow and spend money.
What are government bonds?
A type of investment where you lend money to the government and in return it promises to pay back a certain sum of money in the future with interest
How can quantitative easing increase business investors?
Many investors buy bonds as a safe place to put their money. If the prices of those bonds increases, their safety becomes more expensive so investors are encouraged to buy shares or lend money to business again instead, supporting the economy
What is quantitative easing?
When prices rise too fast, the Bank of England needs to slow down to slow down the rate of inflation. The government reduces its holdings of government bonds by not replacing any which the government repaid. They also began to actively sell bonds to investors.
How does QE affect government borrowing?
It helped the government to borrow money to cover a budget deficit. The government pays less interest on bonds owned by the Bank of England than other investors, taking further pressure off public finances.
What are the impacts of QE?
Helped to keep economic growth strong, wages high and unemployment low. However, it increase the prices of things such as shares and property, benefiting wealthier people who own assets, but younger people struggle to buy first homes and build up savings.
How does QE impact pensions?
Bond prices are used to estimate how much it will cost to provide pensions in the future. Increased bond prices means cost of providing future pensions rises so firms were obliged to make bigger payments into their pensions, reducing possible investment money.
