Analyse and Evaluate the significance of Monetary Policy rules and Monetary Policy targets and constraints in promoting Economic Growth, Economic Stability and International Competitiveness L1. Monetary policies are where the government use changes in the base rate of interest to influence the rate of growth of aggregate demand, the money supply and ultimately price inflation. In the short run economic growth is an increase in real GDP, In the long run economic growth is an increase in productive capacity (the maximum output an economy can produce)
Economic Stability – the avoidance of volatility in economic growth rates, inflation, employment and unemployment and exchange rates. International Competitiveness – The ability of an economy's firms to compete in international markets and, thereby, sustain increases in national output and income.
L2. Monetary policies can be used to promote economic growth, Economic (this stability reduces uncertainty, promotes business, consumer confidence and investment) and International Competitiveness. This causes an in AD, which can be good for an economy. For example if a Government interest rates, people will have an in disposable income, because payments on credit cards will, mortgage payments will ? and it is not worth saving due to the reduced rate of interest, meaning they have more to spend on goods and services, thus AD.
L3. Monetary policies can promote economic growth and stability and international competitiveness as changes in the interest rate affects Domestic Demand (Consumer Expenditure, Investment and Government Spending) and National Demand (Net Exports) via Exchange Rates as when the interest rate so the does the currency's strength. So if the rate of interest increases, so does the strength of the pound, meaning that there is an ? in international competitiveness as more economies want to purchase our currency. This causes an in AD causing the AD curve to shift to the right, from AD1 to AD2. Causing and in employment, production and ?economic growth, ?international competitiveness and ?international competitiveness
If economic growth becomes too rapid it can also be dampened nby an in interest rates causing AD to due to the fact that their credit card charges and mortgages have and it has become more worthwhile to keep money in the bank and reap the rewards from a higher interest rate rather than spend. So peoples disposable income Monetary Policy can promote economic growth and stability because of the Monetary Policy Transmission mechanism; the way in which Monetary Policy affects inflation rates through the impact it has on other macroeconomic variables.
It is said that low and stable rates of inflation provide the framework for economic stability as inflation reduces the purchasing power of money. When the government uses monetary policy to reduce the rate of inflation inflation targeting) they can stop economic stability from becoming unstable as when inflation occurs, and usually wage growth there is a danger that inflation will become out of control so much so that producers and consumers are no longer able to use the signalling function so it can become clear what goods and services consumers most want. Inflation targeting makes the consumers and investors more clear about the future and so they know what to expect so they can plan ahead. This can cause an in C and I and therefore and in AD (shifting the AD curve to the right). The fact that inflation targeting is flexible means it meets the policy target.