Monetary Policy

A summary of monetary policy (macro).

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James Fortson
MONETARY POLICY (UK & EU)
MANAGING AGGREGATE DEMAND
The government can use the following tools to
manage AD:
1. Interest Rates
2. The Money Supply
3. Exchange Rates
QUANTITY THEORY OF MONEY
This equation shows that an increase in the money
supply will cause an increase in price ­ since we
assume that V and T will stay constant.
MV = PT
M = Money Supply
V = Velocity of Money
P = Price
T = Number of Transactions (or total national output)
THE "WAGE SPIRAL"
(1) DEMAND-PULL INFLATION: Money Supply
Consumers/firms have a higher disposable income
Consumption and Investment rightward
shift of AD Price Level. [A to B]
(2) INCREASED EXPECTATIONS: Prices
Expectations Workers want higher wages to
maintain their purchasing power Costs of
production for firms leftward shift of SRAS. [B
to C]
THE BANKING SYSTEM AND
MONETARY POLICY TODAY
Banks make profit when depositors put
money into a bank; this money is then loaned
out to borrowers (at a set interest rate). The
bank then takes the difference as profit.
Banks also make money from mortgages, from
other banks and from fines.
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James Fortson
Northern Rock used a similar model; but instead of using depositor's money, they used the
money from other banks (particularly in the US). The credit crunch and general state of the
world economy caused this bank to go obtain emergency financial support from the Bank
of England.
Blair and Brown initially disagreed over the plans to hand over control of interest rates to the
Bank of England. There were initially potent demonstrations against the plans.…read more

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James Fortson
THE IMPACT OF THE EURO TODAY
The Euro has recently strengthened against the dollar; which
could see increased unemployment. E.g. BMW (German) has
announced job cuts of 5600 whilst Airbus warns it will have to
drastically change it's core structure.…read more

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