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61-handout-2 - Monetary Policy (AS Macro Revision) May 2011...

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Monetary Policy (AS Macro Revision) May 2011 www.tutor2u.net 1 Monetary Policy Economics AS Macroeconomics May 2011 Basics of monetary policy Monetary policy involves changes in Policy interest rates (and other interest rates in the economy) The exchange rate The size of the monetary base The availability of credit To influence The level and growth of aggregate demand and output Control inflationary and deflationary pressures Meet an inflation target and achieve price stability
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Monetary Policy (AS Macro Revision) May 2011 www.tutor2u.net 2 Many different interest rates savings Average interest rates on different types of savings account for banks and building societies Personal Savings Interest Rates Source: Bank of England Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan 07 08 09 10 11 0 1 2 3 4 5 6 7 Percent 0 1 2 3 4 5 6 7 Instant Access Accounts Fixed rate bonds Deposit accounts Interest rates on loans Per cent, source: Bank of England Cost of Borrowing and Inflation Source: Bank of England 05 06 07 08 09 10 11 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 Consumer Price Index Inflation Base Interest Rates (set by BoE) Overdrafts Credit cards Mortgage rates
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Monetary Policy (AS Macro Revision) May 2011 www.tutor2u.net 3 The real rate of interest Real rate of interest takes into account the effects of inflation Real interest rate = money rate of interest (%)–the inflation rate (%) E.g. If money interest rates are 5% and inflation is 2% There real interest rate = 5% 3% = +2% Real interest rates can become negative if the money rate of interest is less than inflation Real interest rates can be positive even if money interest rates are zero! Why? Because of the effects of price deflation E.g. Money rate of interest = 0%, inflation = 2% Real interest rate = 0% ( 2%) = +2% How do rate changes affect the economy?
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This note was uploaded on 02/08/2012 for the course ECO 51844 taught by Professor Sabet during the Spring '11 term at FIU.

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61-handout-2 - Monetary Policy (AS Macro Revision) May 2011...

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