71.

Monetary Policy: an introduction to the MPC and inflation targeting

I. Fill in the missing words
Since the independence of the Bank of England in 997, monetary
policy has been set by the MPC, the Monetary
Policy The government gave the committee the task of achieving
an
target, which was initially 2.5% + 1% and then in December 2003 this was changed to
using the CPI, the Price Index. The MPC meets every month,
although in January 2015 the Governor proposed cutting the meetings to 8 a year, to set the rate,

the interest rate paid on commercial bank reserves. This rate then
influences the interest rates that commercial
banks charge to their borrowers and depositors. If che actual inflation rate
deviates by more than either
side of the target, the of the Bank of England is required to publish an open letter to
the Chancellor explaining the MPC's policies to bring inflation back to target. Choose words
from: Base, 1%,
inflationary, Governor, Consumer, credibility, Committee, 2%, inflation, mortgage.
2. Match each question with one of the answers in the
opposite column.
Question Answer
2. I Inflation is A The manipulation of interest rates and the money supply in order to
manipulate the level of aggregate demand.
2.2 MonetarY policy is B The cost of borrowing money.
1 2.3 The interest rate is A sustained rise in the general price level.
-2.4 The Consumer Price Index is A sustained fall in the general price level.
2.5 Deflation is E Apolicy introduced in August 20|3 in which the
D Governor of the
Bank of England sets out the circumstances in which
interest rates
are likely to rise.
2.6 Forward Guidance is F The average household cost of living excluding housing costs.
3. Data response
The effect of free money is remarkable. In 2009 investors were panicking and there was
talk of another Depression.
By March of 2015 the BBC index of global share prices was more than
17.9% higher than the previous year. That's
largely thanks to prolonged period of interest rates of I% or less in America, Japan, Britain and the
euro zone, which
have persuaded investors to take their money out of cash and to buy risky assets. But the longer the world
keeps its
interest rates close to zero, the greater the danger that bubbles will appear. But central banks are wary of using
interest rates to pop bubbles because risks crushing growth as well. And, with the world
economy in its current
fragile state,they are rightly unwilling to jack up interest rates now.
3.I What do "interest rates of 1% or less" suggest about the level of inflation in much of the world in 2015?

3.2 Why would low interest rates encourage "investors to take their money out of cash"?

3.3 Assess the case for raising interest rates to "pop bubbles".