Role of the Monetary Policy Committee & changes in bank rate

• What is the role of the monetary policy committee?:

  • Monetary Policy Committee the part of the Bank of England which implements UK monetary policy.
• What is the role of the monetary policy committee?:

  • Monetary Policy Committee the part of the Bank of England which implements UK monetary policy.
• If deflation is a threat, the BoE can cut interest rates to boost AD from AD1 to AD2, increasing the price level from PL1 to PL2 and increasing real GDP (Y1 to Y2)

  
• If inflation is above target, the BoE can increase interest rates to reduce AD from AD2 to AD1, reducing the price level from PL2 to PL1, but this could decrease growth as real GDP decreases (Y2 to Y1) and cause some unemployment

  
• When would the MPC be most likely to raise the bank rate?

  When there is rapid economic growth or high inflation
• In which scenario would the MPC be LEAST likely to raise rates?

  Negative output gap and rising exchange rate
• Which scenario is MOST likely to cause the MPC to raise the bank rate?


  Positive output gap and falling exchange rate