monetry policy
- Created by: annie.m13
- Created on: 27-04-18 19:44
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- monetry policy
- involves altering the base interest rates
- determines all other interest rates in the economy
- monetary policy committee (mpc)
- run by the bank of england
- responsible for the monetary policy in the uk
- intrerest rate policy
- takes 2 yrs for the rate to affects inflation
- interest rate transmission mechanism
- influences AD because
- it changes household spending
- changes repayments effecting peoples disposable incomes
- influences new spending
- changes asset values - fall in rates increases profitability = higher dividends
- rate fall makes saving less attractive and increases the prices of property and demand increases
- affects exchange rates which heavily effect exports and imports
- influences AD because
- consequences of changing interest rates
- lowering rates
- saving is discouraged
- ecourages spending
- shifts AD right
- ecourages spending
- new borrowing is encouraged
- investment increases
- shifts AD right
- investment increases
- saving is discouraged
- final effect on real output and price level depends on the elasticity of AS
- increasing rates
- saving encouraged
- disintentivies spending
- AD shifts left
- disintentivies spending
- new borrowing is discouraged
- investment decreases
- AD shifts left
- investment decreases
- saving encouraged
- lowering rates
- quantitative easing
- indroduces new money into the economy when interest rates are approaching 0
- evaluation
- advantages
- direct effect on household spending
- uk consumers are highly interest rate elastic
- mpc is independent from the gov and so is free from political interference
- can be adjusted on a monthly basis
- almost an immediate effect on confidence
- direct effect on household spending
- disadvantages
- a duel economy
- where the service sector is booming and needs high rates but the manufacturing sector is depressed and needs loe rates
- money supply is hard to control
- interest rates my fall close to 0 in times of a recession and the economy might fall into a liquidity trap
- The liquidity trap is the situation in which the current interest rates are low and savings rates are high, rendering monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise.
- may be negative effects
- raising interest rates can negatively effect investment spending
- investment decreases
- and the housing market
- and the exchange rate
- and thus the balance of payments
- and the exchange rate
- investment decreases
- raising interest rates can negatively effect investment spending
- a duel economy
- advantages
- involves altering the base interest rates
- intrerest rate policy
- takes 2 yrs for the rate to affects inflation
- interest rate transmission mechanism
- influences AD because
- it changes household spending
- changes repayments effecting peoples disposable incomes
- influences new spending
- changes asset values - fall in rates increases profitability = higher dividends
- rate fall makes saving less attractive and increases the prices of property and demand increases
- affects exchange rates which heavily effect exports and imports
- influences AD because
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