Monetary policy
- Created by: sammilaw
- Created on: 01-04-15 19:29
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- Monetary Policy
- Chapter 18
- Manipulating money supply and interest rates to control the macroeconomy
- Controlled by the Bank of England
- Aims to remove political influence from meeting the inflation target
- Also responsible for achieving price stability and stability in financial markets
- Affects AD in the short term
- Aims:
- To keep inflation low
- i.e. keep AD low in a positive output gap or increase interest rates
- Maintain positive economic growth
- Aim for full employment
- To keep inflation low
- Increasing interest rates
- Increases the exchange rate (strengthens pound)
- SPICED
- Deters spending > increased saving
- Bigger proportionate effect of homeowners with mortgage payments
- Decreases AD
- Deters investment
- Increases the exchange rate (strengthens pound)
- Real interest rate = interest rate minus rate of inflation
- The exchange rate
- Advantages of a strong pound:
- Cheaper imports
- Lower production costs for producers
- Lower inflation
- Disadvantages of a strong pound:
- Increase in the trade deficit
- Slower economic growth
- Decrease in business confidence and capital investment
- Advantages of a strong pound:
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