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Monetary Policy

Manipulation of Interest Rates to
 achieve Macroeconomic goals
Weapons of Monetary Policy
• Interest Rates
• Exchange Rates
• Money Supply
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
UK Interest 1900 - 2008
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
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)
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

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Monetary Policy

  • 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
  • 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