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  • Monetary Policy Effects and Outcomes Grid: Action

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    Xiaolin Su
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    The document outlines how monetary policy actions of increasing or decreasing interest rates can affect inflation and economic growth. Increasing rates raises borrowing costs, lowers wealth and spending, and reduces aggregate demand, helping to lower inflation. Decreasing rates has the opposite effects, lowering costs and boosting spending, aggregate demand, imports, and inflation. The key transmission mechanisms are how interest rate changes alter borrowing incentives, wealth, spending on consumption and investment, and exchange rates.

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    The document outlines how monetary policy actions of increasing or decreasing interest rates can affect inflation and economic growth. Increasing rates raises borrowing costs, lowers wealth and spending, and reduces aggregate demand, helping to lower inflation. Decreasing rates has the opposite effects, lowering costs and boosting spending, aggregate demand, imports, and inflation. The key transmission mechanisms are how interest rate changes alter borrowing incentives, wealth, spending on consumption and investment, and exchange rates.

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    © All Rights Reserved
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    10 views1 page

    Monetary Policy Effects and Outcomes Grid: Action

    Uploaded by

    Xiaolin Su
    The document outlines how monetary policy actions of increasing or decreasing interest rates can affect inflation and economic growth. Increasing rates raises borrowing costs, lowers wealth and spending, and reduces aggregate demand, helping to lower inflation. Decreasing rates has the opposite effects, lowering costs and boosting spending, aggregate demand, imports, and inflation. The key transmission mechanisms are how interest rate changes alter borrowing incentives, wealth, spending on consumption and investment, and exchange rates.

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    of 1

    MONETARY POLICY EFFECTS AND OUTCOMES GRID

    ACTION EFFECT 1 EFFECT 2 EFFECT 3 OUTCOME


    Increase Interest Rates Increased cost of borrowing Decrease in borrowing Secondary effects Reduced Inflationary pressures
    Less incentive to borrow Lower wealth Multiplier effect Lower CPI, i.e. lower headline
    Lower discretionary income Decrease in Consumption (C) Decrease in Real GDP or rate of inflation
    Lower consumer confidence Decrease in Investment (I) slowdown in Economic
    Lower business confidence Overall decrease in AD Growth
    Lower asset (house) prices Lower Price Level

    Increased purchase of UK Increased demand for Lower import prices Reduced inflationary pressures
    financial assets £sterling on FOREX markets Reduction of imported Lower CPI, i.e. lower headline
    Increased deposits in UK Higher exchange rate inflationary pressures rate of inflation
    financial institutions Higher export prices
    - Lower exports and
    AD so lower growth
    Decrease Interest Rates Lower cost of borrowing More borrowing Secondary effects Greater Inflationary pressures
    Greater incentive to borrow Increase in wealth of Multiplier effect CPI, i.e. higher headline rate of
    Higher discretionary income individuals Increase in Real GDP or inflation
    Greater consumer confidence Increase in Consumption (C) higher Economic Growth
    Greater business confidence Higher Investment (I) Higher Price Level
    Rising Asset (house) prices Components of AD
    Increased AD
    Decreased purchases of UK Decreased demand for Higher import prices Greater Inflationary pressures
    financial assets £sterling on FOREX markets Increase of imported CPI, i.e. higher headline rate of
    Fewer deposits in UK financial Depreciation of the inflationary pressures inflation
    institutions exchange rate Lower export prices
    - Higher exports and
    AD so higher growth

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