Answer to Question #121332 in Macroeconomics for Abiah Kalim

Question

Extract B (lines 9 - 11) states "The Bank of England's monetary policy committee loosened its monetary policy in an attempt to prevent a downturn in the economic cycle"

Explain how monetary policy might help to prevent a downturn in the economic cycle (10 marks)

Answer 1

The monetary policy refers to the policy adopted by the central bank of a country in controlling the payable interest rates for the short term loans to target inflation or the altering the interest rate for price stability. Loosening the monetary policy refers to the adoption of an expansionary monetary policy by cutting the interest rates. Reduced interest rates increases the supply of money in an economy and in effect boosting the aggregate demand. Cutting interest rates reduces the interest payments and increases the disposable incomes which encourages consumers and the firms in the industry to spend as opposed to saving. Conclusively, the monetary policy is used to boost the aggregate demand and enhance spending to avert a looming financial crisis.