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Monetary Policy Review
Transcript of Monetary Policy Review
Income Savings Consumption The Interest Rate Transmission Mechanism 3 Interest Rates Exchange Rates Appreciation Mp Xp Dm Dx Depreciation Mp Xp Dm Dx Balance of Payments Historical Interest Rates What this means If interest rates go up, borrowing becomes more expensive This means that firms and individuals will borrow less money This will mean there is less consumption and investment, both components of Aggregate Demand Therefore, AD will fall What this means If interest rates go up, mortgages become more expensive This means that individuals have less disposable income This will mean there is less consumption a component of Aggregate Demand Therefore, AD will fall What this means If interest rates go up, people get a greater return on any savings This means that individuals are more likely to save This will mean that people are consuming less - the opportunity cost of consuming has grown Therefore, AD will fall Key M = Imports
X = Exports
D = Demand
P = Price What this means If interest rates go up, the price of imports falls, and the price of exports rise This will mean the demand for imports increases and demand for exports falls this will lead to an increase in imports, and a fall in exports Therefore, AD will fall If interest rates go up, the demand for pounds rises as foreign countries put money in British banks UK Government Policy Monetary Policy Committee The MPC is independent of the UK government
This means that any decisions made by the MPC are not affected by the government directly
However, the government does set the MPC's target, which is that CPI inflation should be 2.0%
Inflation has recently been high, although the most recent figures show it dropping to 3.0% - within the acceptable tolerance for the MPC Quantitative Easing QE is a method of monetary policy used by the MPC to try to improve liquidity in the banking system
Liquidity is effectively the ease with which money can move between banks, firms, and individuals.
The Bank of England has injected £325 billion through QE to date