Monetary Policy: Basic Overview of the 'Weapons of Monetary Policy' Use the specific power points and activities on Exchange Rates and Interest Rates to support your knowledge

1. Monetary Policy
Manipulation of Interest Rates to
achieve Macroeconomic goals

2. Weapons of Monetary Policy
• Interest Rates
• Exchange Rates
• Money Supply

3. Monetary Policy in the UK
• Since 1997 the Bank of England’s
Monetary Policy Committee (MPC) has set
interest rates
• Before this it used to be done by
Government
• Changing interest rates will have affects
on both Aggregate Supply and Aggregate
Demand

4. UK Interest 1900 - 2008

5. Interest Rates
• You should know the following
– Interest Rates will affect Aggregate Demand
– Interest Rates will also have an effect on the
value of the £ to other currencies
– Interest Rates are the price of borrowing and
the reward for saving
– Interest Rates can be used to try and control
inflation

6. Exchange Rate
• This is one currencies value in terms of
another e.g. £1 = $2
• You should know
– The strength of a currency has advantages
and drawbacks
– Governments tend to be powerless to control
this
– Interest Rates can effect the value of a
currency (Hot Money)

7. Money Supply
• This is the supply of money in the
economy.
• A central bank can influence this by
changing how much money is printed or
how many Government Bonds are sold
• Typically done in the form of Quantitative
Easing
• Not a huge influence of Monetary Policy