Contractionary monetary policy eval

Question 1

Supply-side shocks

Answer 1

• War in Ukraine caused commodity prices (oil) to rise
  So this may have been the main driver of decreased consumption as prices in the economy would increase due to a left shift of SRAS as a result of higher costs of production. Causing inflation to occur rather than disinflation.

Question 2

Effect on growth and unemployment

Answer 2

Reduced growth and increased unemployment as it was unexpected so firms could not prepare

Question 3

Effect on indebted

Answer 3

Harmed their living standards as repayments increased e.g. repayments on mortage increased by £750 per month on average

Question 4

Effect on investment

Answer 4

Decreased as interest on loans increased, which would increase costs of production

Question 5

Effects on banks

Answer 5

Increased risk of bank failure:
- Households may be unable to repay debts due to increased interest making harder
- Banks find harder to raise finance
- Higher yields for assets across the economy, meaning banks would have to pay out more