Monetary Policy

Mind Map by , created over 6 years ago

Mind Map on Monetary Policy, created by jaz on 05/13/2013.

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Created by jaz over 6 years ago
Monetary Policy Mind Map
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Monetary Policy
1 Definitnon
1.1 managing the economy through influencing the supply of money, int rates and QE
2 What is it
2.1 Money is an asset.
2.2 Short run compared to fiscal policy. However a long term effect is desired. changed monthly
2.3 demand is interest elastic
3 How interest rates affects AD
3.1 interest rates can be increased or decreased in order to control AD.
3.2 If interest rates^ then AD down. Want to cool economy
3.2.1 Firms spend less on investment, due to borrowing cost being high, AD falls, MPS^,
3.2.2 household consumption down, 60% of AD, fall in inflation, controlling inflation is main aim
3.3 Low interest rates mean that businesses have more disposable income to reinvest profits to expand to grpwth. allows for unemployment to decrease=help stable the economy as inflation low too.
3.4 Low int in UK 2009-2012, credit crunch bite business and consumer confidence. 0.5% in 2009 in response to deepening recession and fears of deflation. Therefore deliberately low to try boost AD and output.
3.4.1 This is not working because inflation too ^ so no effect on £ and disposable income ( prices ^ due to oil )
4 Does it control inflation/unemployment/Bop/GDP?
4.1 low int rates so ^ consumer MPC, buy more , AD^
4.1.1 firms expand-employ more= unemployment down
4.2.1 ^interest rates compared to USA and Japan= attracts 'hot money' flows into financial system. Leading to strong £= ^ imports, decrease in exports (appear more expensive, less competitive) therefore worsening of BOP
5 QE
5.1 Govnt giving £ to banks
5.1.1 try to encourage banks to lend to ^ consumer confidence
5.2 Creating/ priniting more £ so = hyperinflation
6 what are interest rates
6.1 there are thousand of interest rates in the financial, not the same in all banks and building societies.
6.2 base rate 0.5% acts as a guide.
6.3 Not the same in all banks and building socities
6.4 Real rate of interest is important to businesses and consumers when making spending and saving decision.
6.5 Real rate of return on savings=money rate of interest-rate of inflation
6.6 Factors considered when setting interest rates 1) GDP growth and spare capacity 2)bank lending and consumer credit figures 3) equity markets and house prices-inflation been criticized for not doing enough to prevent the housing bubble on 2008.4) consumer + business confidence 5) growth of wages, avg earnings and unit labor costs 6) unemployment figures 7) trends in gloabal foreign exchnge markets(exchnge rate)7) international data (developments in emerging market countries and US and Japan)
6.7 Main effects of a change in exchange rate : 1) transmission mechanism of monetary policy (knock on effect) 2) lending(cheap) and borrowing (expensive) rates. Banks and building societies will have similar rates due to competition. if int rate ^ then they will also ^ charges on loans and interest they offer
7 Conclusion
7.1 reduction in int rates or ^ in supply of £ and credit in economy is called EXPANSIONARY MONETARY POLICY/ RELFATIONARY MONETARY POLICY
7.2 ^ in int rates / attempts to control or reduce supply of £ and credit is called CONTRACTIONERY MONETARY POLICY/DEFLATIONARY MONETARY POLICY
7.3 Over last few decades monetary policy has been main policy instrument for managing level and rate of growth of AD and inflationary pressures (since 1997)- HOWEVER the new gov is using more fiscal to reduce defecit.
8 Why has low int rates not boosted AD?
8.1 unwillingness of banks to spend
8.2 low consumer conf, weak expectations, lower effect of rate of changes on consumer demand- i.e low interest elasticity of demand.
8.3 huge levels of debt still need to be paid off including over £200bn on credit cards
8.4 falling/slow ^ in asset prices make it unlikely tht cheap mortgages will provide immediate boost to housing market.
8.5 int rates close to 0 BUT real rate of int charged on loans and overdrafts has ^, cost of borrowing/bank loans is high multiple of policy rate( not same for every bank/building society)
9 Summary
9.1 Mortgage payers have less int to pay- ^ disposable income
9.2 Businesses under less pressure to meet int payments on loans
9.3 Cost of consumer credit should fall encouraging purchase of big ticket items suc h as new car
9.4 Lower int rates might cause a depreciation of sterling thereby boosting competitiveness of export sector
9.5 Lower rates are designed to boost consumer and business confidence

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