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Monetary Policy

  • Monetary policy is the changing of interest rates and money supply
  • The MPC (Monetary Policy Committee) of the BofE is responsible for setting short term
    interest rates since May 1997
    Easing Monetary Policy = Reducing interest rates
  • The aim – trying to encourage people to spend and not save – low cost of borrowing
  • Those who depend on savings will be worse off
  • Businesses will invest more as the margin between investment return and cost of borrowing
    increases
    Tightening Monetary Policy = Increasing interest rates
  • Increases cost of borrowing
  • Encourages people to save

Questions - Use Your Note Taker To Jot Down Ideas / Calculations

The UK government is looking to stimulate the economy. If it just uses monetary policy to achieve
this, what action is it LEAST likely to take?

a) Reduce interest rates.
b) Use quantitative easing.
c) Reduce income tax.
d) Use open market operations.

C)

Reducing income tax is an example of fiscal policy and therefore is not an action that will be taken if
just monetary policy is used.

  • Further Study Text: Pages 116 - 117