Monetary policy

  • Created by: sammilaw
  • Created on: 01-04-15 19:29
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  • Monetary Policy
    • Chapter 18
    • Manipulating money supply and interest rates to control the macroeconomy
    • Controlled by the Bank of England
      • Aims to remove political influence from meeting the inflation target
      • Also responsible for achieving price stability and stability in financial markets
    • Affects AD in the short term
    • Aims:
      • To keep inflation low
        • i.e. keep AD low in a positive output gap or increase interest rates
      • Maintain positive economic growth
      • Aim for full employment
    • Increasing interest rates
      • Increases the exchange rate (strengthens pound)
        • SPICED
      • Deters spending > increased saving
        • Bigger proportionate effect of homeowners with mortgage payments
      • Decreases AD
        • Deters investment
    • Real interest rate = interest rate minus rate of inflation
    • The exchange rate
      • Advantages of a strong pound:
        • Cheaper imports
        • Lower production costs for producers
        • Lower inflation
      • Disadvantages of a strong pound:
        • Increase in the trade deficit
        • Slower economic growth
        • Decrease in business confidence and capital investment


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