Monetary Policy

Definition - Monetary Policy concerns the decisions made by the government regarding monetary variables such as the money supply or the interest rate to manage the economy, stabilise it at full employment.

Analysis - Monetary Transmission Mechanism is the process by which a change in the bank rate affects ifnlation

1st Channel -

Interest Rates Increase (Official base rate)

Market Rates Increase (they follow interest rates)

Domestic Demand C + I + G Decreases (borrowing costs more and so people invest less)

Total Demand Decreases

Inflation Decreases

2nd Channel -

Interest Rates Increase…