Monetary Policy

• Monetary Policy - The manipulation of the money supply and interest rates to achieve government objectives. Actioned by The Bank of England
• The main objective of monetary policy is price stability. Seeking to influence AD as it has little effect on LRAS
• Expansion Monetary Policy - Speed up economy and increase growth
• Contraction Monetary Policy - Slow down economy and reduce growth
• Quantitative easing - When the central bank purchases assets from the open market in exchange for money to increase the money supply within the economy.

  This causes: 1) Increased consumer spending 2) Upward pressure on prices 3) More lending and borrowing
• Interest rates rise -> Reduces disposable income -> Increases saving -> Decreases spending -> AD falls
• Interest rates fall -> Increases disposable income -> Decreases saving -> Increases spending -> AD rises
• Change in interest rates -> Impact on AD -> Effects on jobs, investment and output -> Real GDP and prices -> Inflation
• Quantitative easing was used in 2008 in response to the financial crisis as lowering interest rates wasn't enough.
• Evaluation points - 1) Homeowners on fixed rate mortgages 2) Time lags of credit cards and mortgages as lenders may not change their rate immediately. 3) Effective fall in disposable income for those with savings if interest rates fall.