Summary:
Discusses the effectiveness of using monetary policy alone to bring an economy out of recession. Considers macroeconomic objectives achieved by fiscal and monetary tools. Describes a recession and details possible causes.
The monetary policy committee sets the official base rate of interest for the economy. They have been given an inflation target of 2% and their job is to set interest rates to meet the inflation target. It is believed that monetary policy alone can be used to control the economy.
Recession is a fall in national output. It can be caused by both domestic and external factors and usually a fall in domestic spending, rising unemployment and an increase in government welfare spending.
If monetary policy cut interest rates, consumers will increase spending as it is less attractive to save their money and more attractive to borrow. Businesses would increase investment, as is it cheaper to borrow. If monetary policy increases interest rates, consumers would decrease their spending as it is more attractive to save and less.....
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