3.6 Monetary policy Flashcards
• explain what is meant by monetary policy and how it can be used to achieve economic objectives • analyse how monetary policy can affect growth, employment and price stability • evaluate the effects of monetary policy on consumer spending, borrowing, saving and investment
What does the term ‘monetary policy’ mean?
A policy that aims to control the total supply of money in the economy to try and achieve the government’s economic objectives, particularly price stability by using interest rates and other measure to influence the levels of total demand in the economy.
What is the target range for inflation?
+1%/-1% of 2% is considered acceptable.
How will a decrease in interest rates achieve economic objectives.
Economic growth and low unemployment. Spending in the economy will increase so that income for firm rises, which produce more output and so more workers are employed to meet the extra demand. these workers have incomes to spend and thus the [process continue causing output and employment to rise.
How will a increase in interest rates achieve economic objectives?
Maintain low inflation and balance of payments. Spending in the economy decreases, less demand for output of firms and so firms will decrease price reducing rate of inflation. The reduce in demand for imports also falls achieving a healthier balance of payments.
What does the term ‘quantitative easing’ mean?
The central bank (Bank of England) makes more money available for financial institutions to lend to households and firms.
How does a fall in interest rates achieve growth and employment?
- Borrowing by consumers and firms rise
- Saving falls
- Asset prices rise (house and property prices)
- Disposable income rise for households with mortgages
- External value of the currency falls
How does a rise in interest rates achieve price stability?
- Borrowing by consumers and firms fall
- Saving rises
- Asset prices fall (house and property prices)
- Disposable income fall for households with mortgages
- External value of the currency rises
What unexpected effects can occur from changing interest rates to consumer spending?
Some consumers rely on interest rates as an important part of their income so if interest rates rise, they have higher disposable income and spend more. Banks may not change interest rate in response to a change in the bank rate.
What unexpected effects can occur from changing interest rates to borrowing?
Consumer confidence mean that despite a cut in interest rate some may still decide to save more and spend less due to a recession. Despite a fall in bank rates, banks may still be unwilling to lend and reduce availability of mortgages to increase the deposit needed.
What unexpected effects can occur from changing interest rates to saving?
People may not save up for expensive goods if they can buy it now with available credit. A fall in interest rates and general price levels will not cause much of an impact because real interest is still high and prices will be lower in the future.
What unexpected effects can occur from changing interest rates to investing?
If confidence is low, an interest rate cut will cause firms to still not invest due to recessions.
