Monetary policy
Central bank control of interest rates and money supply.
Monetary policy
Key definitions
Bank rate
Key policy rate set by Bank of England MPC.
Quantitative easing (QE)
Central bank creates money to buy assets.
Transmission mechanism
How rate changes affect AD.
Hot money
Short-term capital flows seeking highest returns.
Looser monetary policy
Lower rates / QE → stimulate AD.
Tighter monetary policy
Higher rates → reduce inflation.
Asset prices channel
Rates affect house and share prices → wealth effect.
Exchange rate channel
Rate differentials affect sterling and net trade.
MPC
Monetary Policy Committee sets UK bank rate.
Key concepts
BoE independent since 1997; targets 2% CPI.
QE used post-2008 and during COVID.
Relevant tips
- List transmission channels in 15-mark answers.
- Evaluate when monetary policy is weak (liquidity trap, high debt).