winniethepotato
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what are the strengths and weaknesses of monetary policy?
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undercxver
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(Original post by winniethepotato)
what are the strengths and weaknesses of monetary policy?
Hey there!

The first question you should be asking yourself is what is monetary policy? Monetary policy is the process by which the monetary authority of a country controls the supply of money, which often targets an inflation rate or interest rate to ensure there is price stability and general trust in the currency.

Advantages:
  • Evidence shows that, in normal conditions, interest rates have a direct and powerful effect on the household spending, suggesting that UK consumers are highly interest rate elastic
  • The Bank of England’s Monetary Policy Committee is independent from government and can make decisions free from political interference
  • Interest rates can be adjusted on a monthly basis, this contrasts with discretionary fiscal policy which cannot be adjusted at such regular intervals
  • While the full effects of interest changes may not be experienced for up to a year
Disadvantages:
  • There are still time lags to see the full effects, and there are some negative effects
  • Raising interest rates can negatively affect on investment spending and the housing market, exchange rate and hence the balance of payments
  • The money supply is tough to control in practice, therefore controlling interest rates is preferred
  • Interest rates may fall to very low levels during a deep recession, and during this the demand for credit may rise, the supply may become trapped in the system (liquidity trap)
Hope this helps!
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