Monetary Policy

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  • Created by: Jess
  • Created on: 19-04-14 11:18

Monetary Policy: central bank/ government decisions on the rate of interest, the money supply and the exchange rate

  • A higher interest rate tends to reduce consumption and lower firms' investment. Likely to encourage foreigners to place more money in UK financial institutions for higher return (hot money flows) - their demand for £s would appreciate its value
  • A higher exchange rate will make exports more expensive and imports cheaper - likely to reduce net exports
  • Rise in interest rate is likely to decrease AD by reducing consumption; investments and net exports
  • Increase in money supply is likely to increase

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