Reference no: EM133504510

Background

Inflationary pressures are broadening out beyond the food and energy sectors almost everywhere, with businesses throughout the economy passing on higher energy, transportation and labour costs by raising prices. (OECD 2022)

With the global economic cycle turning downwards and monetary tightening by most of the major central banks increasingly taking effect, headline inflation is projected to peak in the current quarter in most major economies, and to decline in the fourth quarter and throughout 2023 in most G20 countries. (OECD 2022)

The Bank of England's Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 21 September 2022, the MPC voted to increase Bank Rate by 0.5 percentage points, to 2.25%. (BoE, 2022)

Raising interest rates makes borrowing more expensive and - it is hoped - this can encourage people to save more. As a result, they will buy fewer things and prices will stop rising as fast. But when things like rising energy prices worldwide cause inflation, there is a limit as to how effective UK interest rate rises can be in slowing inflation. (BBC, 2022)

Question 1: Explain the meaning of inflation and why it is considered to be an important objective for the government. Apply relevant economic analysis to evaluate whether monetary policy is the best method that can be used by the central bank to reduce inflation

Question 2: Explain how monetary policy could be used to reduce inflation

Question 3: Draw at least 2 diagrams where appropriate to show how the policy works to reduce inflation this should include and provide and explaination:

-aggregate demand, impact on prices, impact on real output, curve diagram

Question 4: analyze the advantages and disadvantages of the monetary policy

Question 5: Discuss the short vs long-term impact of the monetary policy, will it be more effective in the long run?

Question 6: How will the different demographic groups be affected by the policy in terms of welfare and living standards?

Question 7: What are the potential consequences for other economic indicators of the monetary policy?

Question 8: how effective will the monetary policy be?

Question 9: indicate precisely who benefits from the monetary policy and who loses.