Summary
Summary AS Monetary Policy and Inflation
- Institution
- WJEC
Summary and revision notes on Monetary Policy and Inflation, with AO4 evaluation points included and a page of definitions.
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-POLICY
-MONETARY
THE BANK OF ENGLAND
Deciding interest rates
↳ at 2 % ( 1 %)
keep inflation + 1
-
↳ have sole for level of basic interest
responsibility deciding the rate
↳>
change in output employment & inflation
,
↳
repo rate (base rate)
Overseeing the money supply
liquidity
↳
ensure there is sufficient in the economy
Managing foreign reserves
↳ ensure the settles its international debts
country
Providing banking facilities
↳ to
high street banks
↳ all credit banks must BOE
keep an account with
↳ to the UK
government
↳
keep its account with the bank
Regulating the UK financial system
↳
Financial Committee (FPC)
Policy
① Bank's financial
stability objective
↳ remove/reduce systematic risks
↳ to the resilience of the UK financial
protect &
enhancing system
② to
support the economic
policy of the Government
Prudential (PRA)
Regulation Authority
↳
and
supervision of banks building societies and credit unions
↳ insurers
,
,
major investment firms
↳ 1700 financial firms
regulates around
↳
promote the
safety and soundness of these firms
Lender of last resort
banking system liquidity shortage
↳ with a
↳ funds last resort ·
provide as a
, MONETARY POLICY FRAMEWORK
↳
objective to deliver price stability low inflation to support Government's
:
, ,
economic objectives
↳ inflation target 2 % measured by the CPI /Consumer Price Index
the bank is accountable to
parliament and the wider public
↳
The Inflation Target
↳ remit is not to achieve the lowest possible inflation rate
↳ below 2 % is as bad as above 2 %
↳> inflation target is
symmetrical
↳ if > 3% OR < 1 %
↳ Governor of the Bank the Chancellor
open letter
the must write an to
↳
explaining the reasons
↳ What the Bank to do
proposes
The
Monetary Policy Committee
↳ consist of 9 members 15 from the BoE ,
4 external members appointed by the Chancellor
↳ chaired by the Governor of BoE
↳ meets
monthly for a
two-day meeting
Gradualist Monetary Policy
Approach to
↳
a series of small movements rather than sharp jumps
↳ aim not to shock businesses of their
consumers and in terms
spending
=
gradually / the cost of borrowing
=
:
↑/ the incentive to save
pace of growth moderates/ increases
:
slightly
without
causing negative impacts Macroeconomic objectives
on
↳ to ensure the
public is confident that inflation will be controlled
FACTORS CONSIDERED WHEN SETTING INTEREST RATES
1 .
State of demand
strong or subdued
AD
↳ is
↳ household spending * > inflation -
↑ to curb
spending
↳
signal that interest rate may need to consumer
. The
2
Housing Market
↑
↳ house
prices↑ indicates consumer demand
↳ risk of in demand-pull inflation
a
surge
. The Labour Market
3
↳
higher wages >
rising costs higher prices
-
,
4
. Inflation from overseas
↳
higher import cost
↳ oil
e .
g .
prices
5
. Trends
in the
exchange rate
↳
value ofI >
-
good for
import prices
↳
dampening down of inflation
IMPORTANT
↳
monetary policy designed to be pro-active foward-looking
and
changes work
through the economic system
-
> in interest rates take time to .
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