Saturday, April 12, 2008

Unit 3: Monetary policy; the effect of decreasing interest rates on the economy

This BBC clip shows the effect of a cut in interest rates on aggregate demand

a) What conflicting objectives did the BoE face in deciding whether to change rates?
b) Why did they decrease rates?
c) Using an AD/AS diagram, explain the likely effect on consumption and investment (and therefore AD) and the macreoeconomic objectives
d) What offsetting effect is likely to diminish this expected effect
e) What effect will the interest rate cut have on the exchange rate and so trade in goods and services?

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