monetary policy

monetary policy

a policy in which money supply and interest rates are adjusted to achieve economic objectives

monetary policy to achieve economic growth

decrease interest rates

• causes spending and borrowing by consumers to increase

• borrowing for investment by firms increases

• uk exchange rate falls

monetary policy to achieve lower unemployment

decrease interest rates

• increases demand and spending, increases borrowing by firms

• increase in production

• exchange rate falls - more demand for exports

monetary policy to achieve price stability

increase interest rates

• spending and borrowing by consumers, and borrowing for investments by firms decreases

• exchange rate rises - less demand for UK goods

monetary policy to improve balance of payments

increase interest rates

how can lower interest rates affect economic growth

spending and borrowing by consumers increase which leads to more demand and an increase in output. It also means that firms borrow more to increase investment and output.

how can the UK exchange rate falling due to decreased interest rates affect growth

there’s an increase in the supply for pounds which means exports and now cheaper so greater demand for UK goods and services and more output

how can decreased interest rates cause lower unemployment

due to the increase in demand by lower interest rates, firms need to increase output therefore they have to employ more workers increasing employment

effect of monetary policy on spending

as interest rates fall , people will spend more . However people reliant on savings may spend less as income falls

effect of monetary policy on borrowing

more borrowing as interest rates fall unless consumers lack confidence in the economy.

effect of monetary policy on savings

if interest rates rise so will savings unless prices fall because then cutting interest won’t affect saving

effect of monetary policy on investment

investment depends on the effect on loans and retained profits (savings) for the company. In most cases, investment will increase with interest rates falling

quantitative easing

when the Bank of England electronically creates more money and invests it in the financial sector and government bonds. this makes it cheaper for government and therefore consumers to borrow. it stimulates the economy

why do exchange rates fall if interest rates fall

return on investment and savings decreases so people sell pounds, increasing supply