UK Monetary Policy (Macro)

Question 1

What monetary policy was initially being used?

Answer 1

Contractionary interest rates from 0.1% to 5.25% as well as quantitative tightening policies.

Question 2

Why was high interest implemented?

Answer 2

To manage high inflation of 11.1% in October 2022.

Question 3

What caused this high inflation?

Answer 3

-Expansionary demand side policies, such as QE (495Bn new money pumped into economy).
-The war in Ukraine increasing gas/electricity prices.

Question 4

What is inflation now?

Answer 4

2.6% (took a while due to time lag of transmission)

Question 5

Did inflation actually come down due to intrest rates?

Answer 5

No, actually occurred due to reducing supply side causes of inflation stemming from reducing gas prices.

Question 6

Why else did the government use contractionary monetary policy?

Answer 6

To manage household finances regarding debt and savings for economically inactive, fallen since interest has. (only those who need or can will)

Question 7

Negatives of rising inetrest?

Answer 7

-Demand side shocks.
-Increased unemployment (recession in 2024).
-Lower living standards for indebted. Mortgages increased on average £750 a month.
-Harms banks

Question 8

Why is the rising interest rates bad for banks?

Answer 8

-Hard for people to repay debts (insolvency)
-Liquidity crisis, banks struggle to raise finance and higher yields for assets elsewhere, such as in early 2023 in the US such as banks going bust. (BANK FAILIRE).

Question 9

Have intrest rates fallen recently though?

Answer 9

Yes, down from 5.25% to 4.25% to get out of stagnation and increase AD and increase living standards and confidence generally.