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- action that the central bank or government take to influence how much money is in the economy and money supply.This can be done through interest or exchange rates or buying of bonds through quantitative easing.
- Monetary policy is used to keep to the governments macroeconomic objective of inflation rate of 2%
- Helps keep stable rate of economic growth without making sure that inflation is rising rapidly and unsustainable in the long run.
- Higher inflation will increase interest rates and lower inflation will decrease inflation rates to to higher and lower growth.
- Expansionary monetary policy is used by the governments to lower interest rates to stimulate demand and consumption. It also encourages firms to invest which can lead to the multiplier effect and encourages less saving as customers get a lower rate of return on their savings. Therefore increased consumption and investment shift AD to the right, leading to increase in real GDP.
- Quantitative easily is stimulating money electronically to buy assets- hoping to increase money supply and avoide delationary pressures
- If interest rates are already near 0 then this policy is unlikely to help. The lowering of interest rates may not actually encourage economic growth, maybe due to low confidence levels and firms putting of investing until conditions are more stable.
- Contractionary monetary policy can cause appreciation of the pound and therefore may increase the defeciet in the balance of payments,
- Cause inequality specially to homeowners as whilst raising interest rates encourages saving, homeowners also have to pay more for mortgages
- Time lag - can take up to 18 months for it to filter through the economy- predict and forecasts opening up susceptibility to more risks
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- Fiscal policy involves the government changing levels of taxation and government spending in order to change AD and levels of economic activity.
- expansionary policy - encourages AD through decrease in taxation and increase in gov spending
- contractionary policy- lowers AD by increasing tax and decrease gov spending- this may happen if the economy is growing too fast and at an unsustainable rate
- opportunity cost
- trade off
- Fiscal policy is most effective in deep recessions where monetray policy is ineffective at raising this
- Demand pull inflation- conflict of macro economic objectives
- budget deficit increases
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