Monetary policy essay plans
Explain how the monetary policy transmission mechanism works when the Monetary Policy
Committee (MPC) raises Bank Rate. (15)
Discuss the importance of low interest rates in bringing about sustained economic growth in an
economy such as the UK. (25)
Intro
Low interest rates
One of the central bank’s roles is to set the base rate
Have a profound impact on investment, consumption and overall economic activity
o All contribute to economic growth
Stimulate investment
Lowers borrowing costs for businesses
o Make capital more accessible
o Increased corporate investment
Encourages innovation and investment
o Businesses more willing to take risks
o Invest in R&D and long term projects
LRAS shifts outward
Multiplier effect
o AD shifts outwards twice
Boost consumer spending
Affordable loans for households and individuals
Increased disposable income
o Less saving because it is less attractive
o More money to spend on rest of economy
Increased investment with disposable income
More enterprise growth
Housing market
Low mortgage rates
Higher demand for homes
o More construction
Houses are huge assets
o Purchase of huge financial assets stimulates growth
Export competitiveness
Depreciation of the currency
Enhances exports
Domestically produced goods more competitive
o Increases productivity and production in UK
Improved trade balance
o More competitive exports
o Reduced imports
Hot money flows
Explain how the monetary policy transmission mechanism works when the Monetary Policy
Committee (MPC) raises Bank Rate. (15)
Discuss the importance of low interest rates in bringing about sustained economic growth in an
economy such as the UK. (25)
Intro
Low interest rates
One of the central bank’s roles is to set the base rate
Have a profound impact on investment, consumption and overall economic activity
o All contribute to economic growth
Stimulate investment
Lowers borrowing costs for businesses
o Make capital more accessible
o Increased corporate investment
Encourages innovation and investment
o Businesses more willing to take risks
o Invest in R&D and long term projects
LRAS shifts outward
Multiplier effect
o AD shifts outwards twice
Boost consumer spending
Affordable loans for households and individuals
Increased disposable income
o Less saving because it is less attractive
o More money to spend on rest of economy
Increased investment with disposable income
More enterprise growth
Housing market
Low mortgage rates
Higher demand for homes
o More construction
Houses are huge assets
o Purchase of huge financial assets stimulates growth
Export competitiveness
Depreciation of the currency
Enhances exports
Domestically produced goods more competitive
o Increases productivity and production in UK
Improved trade balance
o More competitive exports
o Reduced imports
Hot money flows
