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Monetary Policy - Coggle Diagram
Monetary Policy
how does monetary policy change interest rates to achieve economic objectives?
economic growth
- reduced interest rate - effect is increased spending, output and employment
low unemployment
- reduced interest rate - effect is increased spending, output and employment
price stability
- increased interest rate - effect is reduced spending therefore more price stability
a healthier balance of payments
- increased interest rates - the effect is reduced spending including spending on imports
how does monetary policy affect growth?
if spending and borrowing by consumers increases
- borrowing is cheaper, so disposable incomes rise, spending incurs a lower opportunity [less saving]. a rising consumption leads to more demand for goods and services and therefore an increase in total output
if borrowing for investment by firms increases
- again borrowing is cheaper, so firms can increase investment leading to more output
how does monetary policy affect employment?
if borrowing for investment by firms increases {assuming that the rate of interest falls}
- then again this leads to more spending on capital goods so suppliers employ more people. more investment may lead to the growth of firms and therefore more employment
if spending and borrowing by consumers increases {again assuming that interest falls}
- this leads to more demand for UK goods and services so more people are employed to provide these
how can monetary policy affect price stability?
if spending and borrowing by consumers decreases {assuming that the interest rates rise}
- borrowing is dearer so those who have a mortgage pay more. spending incurs a higher opportunity cost {more saving} so consumption falls leading to a fall in demand for goods and services
if borrowing for investment by firms increases {assuming that interest rates rise}
- the cost to firms of borrowing or using their own money for investment rises, so less spending on capital goods. Once again demand falls.
what are the effects of monetary policy on consumer spending?
if there is an increase in consumer spending
- explanation: if the fall is large then spending will increase and savings fall, but if the fall is small then there may be little to no effect
the opportunity cost of spending
- explanation: this falls so consumers spend more and save less
What is it?
Monetary policy is a policy that aims to control the total supply of money in the economy