Monetary Policy

Question 1

What is the Bank of England?

Answer 1

Independent from the government since 1997
Monetary Policy Committee (MPC.) meets to consider the latest news on the U.K. and global economy
9 members some appointed via the government and some via the Bank of England. They have a governor of the Bank of England for when there is split votes in decision making
Main point of discussion is to meet an discuss the appropriate rates of interest rates in order to achieve the inflationary target of 2% (with leeway of 1% either way) and to keep growth maintaining the predicted levels.

Question 2

Roles for the Central Banks

Answer 2

Monetary stability - Ensures stable prices and confidence in the currency
Financial stability - savings loans and confidence

If stability breaks down then there will be social and economic consequences e.g. banking failures in Cyprus 2013. Led to a 10 billion Euro bailout.

Question 3

Factors which the MPC has to consider when setting interest rates

Answer 3

GDP growth and spare capacity - Want to grown in line with production probabilities.
Bank lending consumer credit figures - levels of equity, household wealth, borrowing and retail spending.
Equity shares and house prices - In 2008 the Bank of England was criticised for that doing enough to prevent the housing bubble.
Consumer confidence and business confidence
Growth of wages, average earnings and unit labour costs - Wage inflation can cause cost push inflations.
Unemployment figures

Trends in global foreign exchange rates
- weaker exchange rate can lead to more imports costing more - cost push inflation
Strong inflation rates Can lead to slow down in the economy because there will be a fall in exports - less competitive.

Question 4

Transmission mechanism of monetary policy

Answer 4

The ways in which an economy is impacted and influenced by a change in interest rates. E.g. aggregate demand, output and prices

Question 5

Impacts of interest rates

Answer 5

Housing markets and house prices go up if interest rates do and vice versa
Mortgage owners and businesses have less disposable income and less profit if interest rates go up and vice versa
Savers disposable income goes up if interest rates go up and vice versa
Consumer and business demand for credit goes down when interest rates go up because it costs more and vice versa, resulting in less business investment as well
Consumer and business confidence go down if interest rates go up and vice versa.
Exchange rate goes up if interest rate goes up (hot money) and vice versa.