ESSAY: Evaluate, with the aid of a diagram, the effectiveness of using monetary policy to achieve the governments macroeconomic objectives

Question 1

Definitions of monetary policy and macroeconomic objectives

Answer 1

Macroeconomic objectives- the 5 objectives of economic growth, low unemployment, stable prices, low inequality and sustainable balance of payments
Monetary policy- instruments controlled by the bank of England which included QE and interest rate adjustment to pursue the 2% inflation rate target

Question 2

How it can be effective with a diagram?

Answer 2

• a combination of interest rates and QE can raise or lower the level of consumption and investment because it will affect the level of borrowing by businesses and consumers, which will in turn determine the level of demand pull inflation
• increasing interest rates can also have BOP impacts ie it increases the value of our currency and makes imports cheaper, which will reduce cost push inflation but makes us less competitive as our exports are more expensive
• AD and AS diagram moving forward or backwards depending on interest rates

Question 3

How it may not be effective with a diagram?

Answer 3

-supply side policies may be more effective when the economy is close to full capacity as It can reduce inflationary pressures whilst also encouraging increases in economic growth
-monetary policy may be difficult to get right due to a conflict of interests; raising interest rates makes borrowing more expensive for people in the UK but people with high propensity to save ie higher income people are better off due to the increases return they get from such interest rates
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Question 4

What it depends on??

Answer 4

• how low interest rates already are ie in GB after Brexit the base rate is already so low that it is difficult to cut further
• which objectives are Most important
• the position of the AD curve
• effectiveness of other polices ie fiscal and supply side