The types of policy and their effects (Evaluating the effects on spending…
The types of policy and their effects
Expansionary Monetary Policy
This policy mainly focuses on trying to get consumers and businesses to spend more in order to stop low unemployment and and increase economic growth.
Borrowing by consumers rise
Decreasing interest rates = cheaper costs of borrowing
Consumers made to spend and borrow more
Borrowing by firms rise
Asset prices rise
The value of currency falls
Disposable income rises for people with mortgages
Contractionary Monetary Policy
This policy is used whenever the MPC predict that the inflation rate is going to go above the 1-3% target range, so they use it to decrease spending.
Asset prices fall
Borrowing by firms fall
Disposable income falls for people with mortgages
Borrowing by consumers fall
increasing interest rates = dearer cost of borrowing
Consumers made to save more
The value of currency rises
Evaluating the effects on spending,borrowing, saving and investment
As the interest rates fall, it can affect everyone, especially those who have mortgages. The lower interest rates mean they have to pay less, leaving more disposable income for consumers. This can increase overall spending.
The same goes for an increase in interest rates. This increases the payment for mortgage every month and that leaves less disposable income for consumers. This policy won't have much effect on those who have a fixed interest rate
Borrowing should increase if rates fall because the consumers pay back a smaller loan. This encourages them to spend on big ticket items e.g. cars, electrical appliances, holidays, e.t.c.
Borrowing should decrease when rates increase as that means a bigger land to pay, which means less disposable income.
For the same reasons of decreasing consumer spending when interest rates increase, consumers will be encouraged to save more, and vice versa for decreasing interest rates.
Businesses can also be affected by the increase or decrease in interest rates. The higher/lower interest rates mean that businesses may choose to invest in more capital goods, or not invest due to high loans. Businesses may not even invest even if interest rates are lowered because of low business confidence.