Notesale: Turn your study into money

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Monetary Policy
The UK economy is in a deep recession
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● The real rate of return on savings is the money rate of interest minus the rate of inflation
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Real interest rates become negative when the nominal rate of interest is less than inflation
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Price deflation can lead to an increase in real interest rates
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1
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2
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4
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Bank lending, consumer credit figures, retail sales
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Consumer confidence and business confidence

Growth of wages, average earnings, labour productivity and unit labour costs, surveys on labour
shortages
6
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Trends in global foreign exchange markets (ie is the sterling (the pound) appreciating or
depreciating against other currencies)
8
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This stimulates spending in the economy, as there is more
money in the economy
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By lowering the interest rates this will encourage people to borrow and spend money and discourage
saving
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This will allow the UK to come out of a recession and be able to economically grow
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However this will create a balance of trade deficit as people will be
buying more imports due to the inflation rising to meet the target and them having higher incomes
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Aggregate demand’s largest factor is consumer spending therefore
if more households are spending the economy will grow
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This will
result in the MPC lowering the rates to sustain inflation and growth however enough money remaining in
the banks
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Using monetary policy, evaluate measures the UK
government could use to achieve its macro-economic objectives (25 marks)
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Define interest rates: cost of borrowing, reward for saving

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This could result in The Keynesian Liquidity Trap - where lowering interest rates and a high
amount of cash balances in the economy fail to shift aggregate demand to right

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Define investment:​ spending on capital goods

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Increase interest rates in order to increase AD because of consumption increasing as AD = C + I
+ G + (E – I)

Investment results in increasing production as firms invest in training and capital goods which
results in specializing in an industry and as a result this causes other countries to demand the
specialized good and therefore Exports increase which increases AD
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Depends on the rate of interest rate
Quantitative easing​ - define, increasing the supply of money
When interest rates are low that shifts AD to the right therefore increasing price levels and
inflation and to control that, quantitative easing is used in order to shift SRAS to the right in order
to control inflation
Could reduce the value of money if inflation does not reduce- purchasing power of money will
stay the same if inflation

INFLATION:
Deflationary monetary policy- by increasing interest rates and decreasing money supply aggregate
demand will shift left, so people save more and borrow less therefore, consumption and investment would
go down
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Extent of the shift would depend on the extent of change
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Improving international competitiveness:
1
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Freedom to set/adjust monetary policy when conditions change
3
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A diversified economy
5
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Strong non- price competitiveness of domestic businesses
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POINT: Monetary policy may improve competitiveness if the central bank intervenes in
the currency market and is successful in achieving an exchange rate depreciation
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This might lead to expenditure- switching effects causing an

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expansion of demand for exports and a contradiction in import demand
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EVALUATION: A currency depreciation does little to improve competitiveness in the
longer term
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Higher cost-push inflation therefore erodes gains in price
competiveness

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