Macroeconomic Policies

Demand Side Policies: Monetary Policy

Changes to interest rates, the supply of money and credit and also changes to the value of the exchange rate

MPC

9 experts at the Bank of England who meet every month to decide what the Bank Rate should be

Quantitative Easing

• Where BoE buys government bonds and other financial assets from commercial banks

• This injects money directly into the economy

Exchange Rate

The value of one currency in terms of another e.g. how many US dollars you can get for one British pound

Expansionary Monetary Policy

Decreases interest rates to increase AD, boost growth and reduce unemployment

Contractionary Monetary Policy

Increased interest rates to decrease AD and inflation

Impact of Monetary Policy on AD: Consumption

• Cheaper borrowing

• Higher marginal propensity to spend - any increase in income leads to a bigger rise in consumption causing large multiplier effect

• When credits are cheaper and easier to access consumers are more willing to borrow money to finance expensive items such as houses and cars as cost of repaying is lower

• If saving gives better return people might spend more and spend less

• This reduces C and more disposable income is diverted to savings

• Higher mortgage repayments reduce RDY so less C