Monetary Policy Flashcards
(12 cards)
Monetary Policy
changes in interest rates , money supply to influence aggregate demand in an economy
Monetary Policy App
funding for lending-borrowed £32.1bn from BOE in March 2016
House prices 2% growth slowed 3.2% to 4%
Fall in Interest rates cause Future consumption and Investment to Fall
fall in interest rates
increase in loans
increase in debt
future c and i fall
Positives of Expansionary Monetary Policy transimission Mechanism
Cut in Interest rates
Less COB
I AND C
REDUCTION IN MONTHLY MORTGAGE REPAYMENTS
more disposable income
Cut in IR(4.75-4.5%) exepected to be 3.25 % end of year
less hot money flows
WPIDEC
less mortgage repayments – more disposable income(mortgage rates drop below 4% feb 2025)
How the Central bank reduce interest rates
Reserve Requirements-level of reserves as a percentage of bank deposits a commercial bank must hold at a central bank. Reducing it means less money held at central bank which means increase in money supply cause higher interest rates
Reducing bank rate-interest rate charged to commercial banks when they borrow from central bank, reducing it commercial banks hav eto pay less in interest to cetral bank increase money supply
central bank buy bonds held by commericala banks this increases money supply by replacing less liquid financial assets for liquid depoisits.
why might lowering interest rates not be effective at boosting AD
lower IRs more Investment however-depends on business confidence–in recession -firms will not invest+ consumers will save rather than spend–not expecting profits to be made(LIQUIDITY TRAP)
Lower IRS–house prices up–house prices become overvalued–Demand drops sharply–house prices start to drop–homeowners lose wealth–negative wealth effect
lower IRs–lower Mortgage repayments–more disposable income more c and Ad–however mortgage repayments are fixed for 2 or 5 years so when irs drop homeowners disposable income stays the same–no increase in c or ad not effective in SR(time lag)
Lower IRS–WPIDEC inn sr uk locked into trade agreements with other countries –our x are cheaper but other countries are not buying anymore less value x less ad
depends on irs in other countrries
Genera Eval
IRS have a zero-floor cannot go any lower
why might lowering itnerest rates not be effective at boosting growth
if there is lack of spare capacity
no further growth
irs not effective
(It forecast UK growth of 0.8% this year - down from the 1% it expected three months ago - and a figure of 0.9% for 2026) (10% of trump tarrifs)
uk growth rate stat
jan 25 =-0.1%
febraury 25 =0.6%
higher interest rate control inflation
increaase IRs
increase rfs
increase hot money flows
SPICED
Price of exports increase
less x-m)
increase irs –increase cob –less ad
why might interest rates not control infation
higher irs–does not affect cop–does not reduce cost-push inflation–inflation 11.1%(“2022) due to higher global energy prices (ukraine -russia conflict less s of oil and gas– higher irs not effective
irs need to increase signifcantly to reduce ad–time lag due to the ir decision every 6 weeks
spare capacity-lots of spare capacity-fall in ad does not reduce price level
depends on economic cycle–higher irs should reduce borring and c and i but in a boom high confidence despite hihgh irs consumers still spend +investment still occurs –ad does not fall
if wages are rising consumers will still spend despite higher ir–no fall in ad(In December 2022, for instance, median nominal wage growth was 6.1%, and consumer price index (CPI) inflation was 6.4%.) ( average uk wage growth =5.8% inflation at 2.6 thereby real incomes rising irs are irrelevant)
three drawback of higher interest
higher irs lower ad lwoer growth less ddl more cyclical up
lower income lower sol
more debt less disposable income less future c less ad
higher irs in uk banks-more not money– more demand for pound spiced-less net exports-less ad
deflationary spiral–prices drop-consumers stop–economy flop
higher interest rates less FDI occuring due to less growth and stronger currency
