- Monetary policy
- Monetary policy is a central bank's management of interest rates and credit conditions to influence the level of economic activity.
- Fiscal policy
- Fiscal policy is the use of government spending and tax policy to influence the path of the economy over time.
Loose and tight monetary policy
Can you name the two stances monetary policy can take?
A rate change pushes aggregate demand one way or the other.
Loose, or expansionary, monetary policy lowers interest rates and stimulates borrowing, so investment and big-ticket consumption rise and aggregate demand shifts right.
Can you think of an example?
In a recession, with inflation below target, the Committee cuts Bank Rate from 4 to 3.75 per cent. Variable-rate mortgage payments fall, and a firm goes ahead with a warehouse it had shelved.
Tight, or contractionary, monetary policy raises interest rates and reduces borrowing, so firms invest less, households borrow less for houses and cars, and aggregate demand shifts left.
Can you think of an example?
Inflation stands at 4.5 per cent near full capacity, and the Committee votes six to three to raise Bank Rate from 4 to 4.25 per cent. Mortgage payments rise and a firm postpones a new warehouse.