Monetary Policy
Monetary policy involves central bank actions to control money supply and interest rates, aiming to achieve stable prices, full employment, and economic growth. In the UK, the Bank of England sets interest rates aiming for 2% CPI inflation.
Real World
In 2022, the Bank of England raised interest rates from 0.1% to 3.5% over twelve months to combat inflation that had surged above 10%, making mortgages significantly more expensive for millions of UK homeowners.
Exam Focus
Always explain the transmission mechanism — state how rate changes affect borrowing, spending, AD, and then inflation sequentially.
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