Monetary policy (Macro) Flashcards
Cards on what monetary policy is, why it's used and the impacts it can have
What is monetary policy?
Government policy, manipulation of the price and availability of money in the economy to achieve economic objectives
What does monetary policy focus on?
adjusting interest rates
Why is monetary policy used?
To achieve the governments inflation rate targets.
Who is responsible for changing interest rates?
MPC (Monetary policy committee)
Who does the MPC belong to?
A part of the Bank of England
How often are interest rates considered?
Every month
What effects on the UK economy will changing the bank rate have?
-Borrowing
-Exchange rates
-Savings
-Investment (extension of borrowing)
-Imports/exports (Linked to the exchange rates)
Why will changing interest rates impact on investment?
Higher interest repayments discourage the use of loans, as they are now less profitable, as such fewer projects are undertaken
Why will changing interest rates impact on the exchange rate?
Increasing interest rates will increase the investment of ‘hot money’, increasing demand for the currency and it appreciates.
How long does it take for the effects of interest rates to be felt?
1-2 years
What will be the impact on tax returns if interest rates rise?
Lower tax revenue (lower economic activity)
How will a rise in interest influence employment?
Increased unemployment, less AD = cyclical unemployment
Limitations of interest rates?
Time lag, uncertain effects (depends on the current economic position), changes need to be significant
How much are interest rates changed by?
+/- 0.25%
What happens to exports when interest rates increase?
Less competitive
What is the transmission mechanism?
The way in which interest rates work their way through the economy
