Monetary Policy
Sources – Tutor 2u and bankofengland.co.uk
What is monetary policy?
What are the government’s objectives for monetary policy?
Who manages monetary policy?
How do they manage monetary policy?
http://www.bankofengland.co.uk/education/Pages/resources/films/howdoesthebankmanageinfl
ation.aspx
What information do the authorities consider when deciding on monetary policy?
Explain how interest rates affect the government’s objectives using the transmission mechanism.
The Transmission Mechanism
Scenario – The economy is in the
boom phase of the economic cycle.
There is a positive output gap and the
predictions for Aggregate Demand
are that it will continue to rise.
Response of the
MPC
Response of lenders
and why
Response of
consumers and
firms
Impact on asset
prices eg housing
Impact on the
currency and
exports
Impact on
Aggregate Demand
Impact on inflation
Scenario – The economy is in the
recession phase of the economic
cycle. There is a negative output
gap and the predictions for
Aggregate Demand are that it will
continue to fall.
Explain the purpose of quantitative easing.
http://www.bankofengland.co.uk/monetarypolicy/Pages/qe/default.aspx
Explain the consequences of increasing the money supply
Helicopter money
Evaluation of monetary policy
Strengths
Impact on expectations
Weaknesses
Conflicting objectives
The transmission mechanism
Time lags
Flexibility
Liquidity trap