1. AS text p.143 – p.145 Monetary Policy Lesson Objectives Define and explain Monetary Policy Discuss the role of the MPC and what factors it must consider Assess the impact of interest rates on inflation  Deflationary policies  Reflationary Policies

2. AS text p.143 – p.145 Monetary Policy Attempts to influence the level of economic activity through changes to the amount of money in circulation and the price of money Interest rates the key area of Monetary Policy

3. AS text p.143 – p.145 Monetary Policy Short-term interest rates set by the Monetary Policy Committee (MPC) of the Bank of England Meets for 2 days each month to decide on rates The ‘official rate’ is the rate at which the Bank of England will lend to the financial system and influences the structure of all other interest rates

4. AS text p.143 – p.145 Monetary Policy Article MPC

5. AS text p.143 – p.145 Monetary Policy Supply of Money:  Narrow Money – notes and coins in circulation (M0)  Broad Money – Notes and coins plus money held in bank and building society accounts (M4) Explain how a rise in MS will affect AD?

6. AS text p.143 – p.145 Monetary Policy affects; Explain how higher or lower rates will affect AD C + I + G (X - M) Loans Savings Mortgages Investment Exchange Rates

7. AS text p.143 – p.145 Raising Interest Rates Reduces the Consumption component of AD:  Increases opportunity cost of spending (makes saving more attractive)  Increases the cost of consumer credit Reduces the Investment component of AD:  Increases the cost of business borrowing (Deflationary Monetary Policy)

8. AS text p.143 – p.145 Lowering Interest Rates Increases the Consumption component of AD:  Reduces opportunity cost of spending (makes saving less attractive)  Reduces the cost of consumer credit Increases the Investment component of AD:  Reduces the cost of business borrowing (Reflationary Monetary Policy)

9. AS text p.143 – p.145 Interest rate Mechanism

10. AS text p.143 – p.145 The Interest Rate Transmission Mechanism 1 Interest Rates Borrowing Individuals Credit Loans Consumption Firms New Loans Investment Existing Loans CostsEmploymentMargins Consumption

11. AS text p.143 – p.145 WHY DO WE NEED MONETARY POLICY? Keeping inflation low means a stable environment for people and business, and therefore creates the optimum conditions for the best possible level of economic growth. This in turn should have an effect on;  Minimising unemployment  Help the economy to grow at a stable rate and avoid boom/bust cycles

12. AS text p.143 – p.145 HOW MONETARY POLICY WORKS The Bank of England study inflationary trends in the economy. This involves looking at a range of economic variables such as: Unemployment, consumer confidence Spare capacity in the economy Exchange rate index House prices Economic Growth

13. AS text p.143 – p.145 Monetary Policy Lesson Objectives Define and explain Monetary Policy Discuss the role of the MPC and what factors it must consider Assess the impact of interest rates on inflation  Deflationary policies  Reflationary Policies