Tight monetary policy implies the Central Bank is trying to reduce the demand for money and limit the pace of economic expansion. A tightening of monetary policy, could involve an increase in interest rates. – Higher interest rates increase the cost of borrowing and discourage investment and consumer spending. A tightening of monetary policy would …
Forward guidance is when the Central Bank announces to markets that it intends to keep interest rates at a certain level until a fixed point in the future. The aim of forward guidance is to influence long term interest rates and market expectations. For example, the Central Bank might want to boost economic activity by …
Readers Question: From the current economic crises government has been slashing its base interest rates to now 2%. However, how would deflation which is currently being experienced in several countries mainly due to decreasing fuel prices affect the attempted recovery from this crisis? Deflation makes monetary policy much less effective. In fact, deflation can cause …
US Debt is Set to Massively INCREASE – Does it Matter?Watch this video on YouTube As a share of GDP, US debt is forecast to rise from the current level of 100% of GDP towards 180% by 2050. This is unprecedented – higher than the second world war. However, the recent budget resolution to …
Why has the Pound Sterling been falling? The Pound has been in long term decline since after the Second World War, when £1 = $4.05. In recent decades the pound has continued to decline. In particular since the great financial crash of 2007, which hit the UK hard. In recent years, the combination of Brexit, …
In theory, there is a strong link between the money supply and inflation. If the money supply rises faster than real output, then prices will usually rise. This means if a Central Bank prints more money, we will often (though not always!) get higher inflation. Explanation of why increased money supply causes inflation The money …
Readers Comment. Why doesn’t the Bank of England just print the money instead of borrowing the money? Printing more money doesn’t increase economic output – it only increases the amount of cash circulating in the economy. If more money is printed, consumers are able to demand more goods, but if firms have still the same …
Readers Question: would you please explain to me how we can have no inflation, or low inflation if the government injects two or three trillion dollars in the US economy and output falls? This is an interesting question. Although printing more money tends to cause inflation, there are circumstances where you can increase the money …