Monetary Policy - Unit 2 (AQA)

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  • Created on: 22-01-13 19:17
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Monetary Policy ­ Revision Sheet
Controlling the macroeconomy through changes in monetary variables (e.g. money
supply or interest rates)
Policies that aim to influence economy's AD (Designed either to stabilise level of
output and employment or stabilise price level)
Prime Instrument = Interest Rate
Through the interest rate, monetary policy affects AD
High Interest Rate = Firms spend less on investment and Household consume less
and save more (more attractive)
High Interest Rate = Higher cost of borrowing = People discouraged from borrowing
Changes in the rate of interest takes time to impact on overall economic
Impacts of Interest Rate Changes on AD:
Housing Market ­ Higher interest rates = increased costs of mortgages = reduced
demand for housing
Disposable Incomes of mortgage payers ­ High interest rates = less disposable
income of homeowners who have variable rate mortgages = less spending
Disposable income of savers (those who have paid off their mortgage) ­ High
interest rates = More disposable income
Consumer demand for credit ­ High interest rates = increased cost of credit =
Reduced spending on consumer goods (impacts on retail sales)
Consumer & Business confidence ­ Worried about risk of recession, Interest rate
cut can boost confidence and spending ­ Cut interest rates too quickly, shows
people that Bank is concerned about recession = reduce confidence and spending

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Business Investment ­ Firms look at actual and expected interest rates when
deciding whether or not to invest in new capital equipment ­ A rise in short term
rates may dampen business confidence and lead to less investment
Exchange Rate - Higher UK interest rates may lead to the strengthening of the
exchange rate of the pound = Less Exports as they are more expensive
Interest Rates ­ Control AD
Too much AD in economy (Demand Pull Inflationary Pressure) = Increase
interest rate = reduced…read more

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really helpful, thanks


A 2 page summary of how monetary policy works. Useful for last minute revision.

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