Unit 8 Written Assignment: A Summary of the Paper “The transmission mechanism of monetary policy”
Introduction to Finance
University of the People
In England, the party responsible for setting the short-term interest rate is called the Monetary Policy Committee, or MPC. The channels through which the interest rate that the MPC sets affect the economy and affect inflation, are often referred to as the transmission mechanisms of monetary policy. In this essay, which summarizes the paper called “The transmission mechanism of monetary policy”, the Bank of England illustrates the transmission mechanisms that the MPC believes to be true. The paper “The transmission mechanism of monetary policy” is divided into two
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Official interest rate changes will also influence asset prices. For example, bond prices are inversely influenced by long-term interest rates. Finally, the official interest rate will also affect the exchange rate which the paper defines as “the relative price of domestic and foreign money” (George et. al, n.d.). When the official interest rate rises, domestic currency (the GBP) will see appreciation making investors want to invest in pounds. Another key point is that with changes in the exchange rate, there will also be a change in the value of domestic and foreign exports and imports. Finally, a change in the official interest rate can also affect people’s expectations and confidence in the economy. For example, some may believe that an increase in interest rates is a signal that the MPC thinks that the economy is expanding thus making further growth likely or, a contradictory interpretation may be that the MPC thinks that the MPC may need to slow growth in order to control inflation (George, n.d). Change in interest rates, asset prices, and exchange rates also affects the spending and saving habits of individuals and firms. Changes in these three factors change the interest rates on their debts and savings and the change felt the most is a change in the interest rate on personal debt which is usually held in the form of a mortgage where 80% of mortgages in the UK are on a floating-rate. The higher prices of goods and services due
There are specific ethical considerations that need to be addressed when investigating Homicide and rape. A few of these ethical considerations are shared between the two such as the investigators mind state. This plays an important role in the preparations required for a successful prosecution. The investigator must be open-minded to any and all possibilities and be un-bias. The investigator must also know how to conduct all the elements of an investigation in the proper manner from a professional and legal aspect.
The legitimacy of the criminal justice system is based largely upon both its effectiveness and its fairness. Its effectiveness is judged by its ability to investigate and detect crime, identify offenders and mete out the appropriate sanctions to those who have been convicted of offences. Its fairness is judged by its thoroughness and the efforts it makes to redress the resource imbalance between the accused and the state at the investigatory, pre-trial, trial and appellate stages. The system does this by providing evidentiary protection and effective legal representation at all points.
Interest rates affect everything in the business world, including the amount of money you must pay on your loans and the ease of obtaining those loans, credit card rates and even the stock market. This is because high interest rates reduce corporate earnings by slowing business and making it more expensive to do business, so the prices of a company’s stock will very likely decline as its earnings declines.
Monetary policy, ‘The government’s policy relating to the money supply, bank interest rates, and borrowing’ (Collin: 130), is another tool available to the government to control inflation. Figure 4 shows, that by increasing the interest rate (r), from r1 to r2, the supply of money (ms) is reduced from Q1
Changes in interest rate will impact on the economy. It can affect the consumption spending, the inflation rate, the unemployment and employment rate, and the GDP. Consumption spending is affected by interest rate is because when the interest rate is low, people will be willing to borrow money from bank and spend it on goods or services, allowing the spending to go up. When the spending goes up, the inflation and GDP will increase. Then,
a) Keynesian model presumes an inverse relationship between real interest rate and household consumption expenditure which partly justifies the monetary easing policy to fend off economic weakness in recession periods. Please describe the transmission mechanism of interest rate through the economy in general. Which components of PAE are affected by changes in interest rates and how? (20 marks)
Monetary policy is the method by which the government, central bank, or monetary authority controls the supply of money, or trading foreign exchange markets. This policy is usually called either an expansionary policy, or a contractionary policy. An expansionary policy multiplies the total supply of money in the economy, and a contractionary policy diminishes the total supply. Expansionary policy is used to tackle unemployment in an economic decline by lowering interest rates, while contractionary policy has the goal of elevating interest rates to fight inflation. Monetary policy reposes on the relationship between the rates of interest in an economy and the total dispense of money.
Interest rates are the most important relative prices of an economy. These influence the decisions of investors and consumers. They also determine the level of income and employment in an economy. They are indicators that guide consumers when they should invest and when they should save. Interest rates determine the present and future consumption. If these are set at very low levels in real terms and even worse if
An interest rate is the amount of profit that is earned over a period of time, the amount of interest acquired is proportional to how much is lent or borrowed. Interest rates give incentives for business and banks to borrow and lend money in order to stimulate the economic activity in any given country. Institutions lend money to borrowers up front in order to receive more money in the future. Some factors to consider when dealing with interest rates are the currency of the amount that is lent and borrowed, the residual term, and the default probability, or the probability that a borrower will not satisfy their debt obligations. Interest rates are extremely important in monetary policy, which is an economic process that has a specific
Understanding the response of personal savings and expenditure to changes in the interest rates is a central to many issues in the economic policy. If personal savings decline as a result, the overall increase in the national savings would be less than the reduction in the budget deficit. Alternatively, contractionary monetary policy generally causes interest rates to rise. It personal saving increase as a result, the corresponding fall in consumer expenditure helps to slow the economy.
This paper focuses on Monetary Policy, which centres on the connections between money, banks, and credit to lenders. In addition, this paper will cover the effect on macroeconomic factors such as GDP, unemployment, inflation, and interest rates. With many combinations of monetary policy, the paper covers the optimal balance between economic growth, low inflation, and a reasonable rate of unemployment.
Dotsey and King (1983) implied the aggregate supply and rational expectation theory to explore the monetary policy. Consequently, they suggest that the supply hypothesis and rational expectation are conducive to the draft of an activist monetary policy. Therefore, the implementation of the policy of the central bank should make the general price level changes can be identified by economic agents. Dotsey and King (1983) state that under the rational expectation assumption, the changes of money supply response to movements of interest rate can be identified by the agents in the economic
As stated before interest rates are influenced by many different factors, “bank rates in general, follow policy changes, bank rates also change in response to market conditions, independently of changes in the official target rates” (Lim, 2013). For example the financial crisis in 2008, caused by the housing market, resulted in tight credit conditions and high interest rates.
In this content, monetary policy could be defined as a policy which deals with discretionary control of money
The role of the commercial banks in the transmission of monetary policy has been studied in both the theoretical and prior empirical literature. These