Monetary+Policies+IGCSE

=Monetary Policy =

 Attempts to control the money supply or the rate of interest are examples of monetary policy. The most commonly used examples of monetary policy are:
 * Interest Rate Control
 * Direct Controls

How Interest Rates effect the Economy.
Low interest rates encourage people to spend using credit. Low interest rates should boost consumer spending overall and especially for expensive consumer durables such as cars which are often bought on credit. Equally low interest rates may mean people prefer to spend rather than save
 * Credit demand and Savings

Firms take interest rates into account when deciding whether to proceed with investment spending. A fall in rates should increase business confidence and raise planned investment
 * Investment by firms

Lower rates might lead to a depreciation of the currency. If interest rates in China fall, then less people will bring money into China, to save in Chinese banks. This will lead to a fall in demand for RMB and so a depreciation in the currency. This will make imports more expensive and possibly lead to inflationary pressures. The opposite occurs if interest rates are high. The RMB appreciates and so import prices are low and inflation is controlled.
 * Exchange Rates

When interest rates fall, not everyone benefits. People with savings stand to lose out from big cuts in interest rates.
 * A Redistribution of Income for Savers & Borrowers

=Direct Controls =

These are specific controls directed at banks with the aim of restricting their ability to lend. An example is forcing banks to hold a higher proportion of deposits in cash reduces their ability to increase lending. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Equally in times of recession the Government can simply print more money to raise Aggregate Demand and promote economic growth

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Not strictly Monetary policy but a tool that the Chinese Government uses a great deal to control inflation is prices and incomes policies. These used to be used in the past in Western economies. Basically the government directly controls prices and wages. The Chinese government can do this as inspite of the growth of the market economy, it still has huge control of the economy.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">**Student task:** <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Here is a link to a great simulation that you can play that allows you to manipulate interest rates in order to control inflation. I'll assign you groups and each week for the remainder of the term we'll spend time in class looking at how successful you have been. You'll need to meet up once a week for at least 40 minutes to decide upon your team's strategy <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">[|Monetary policy game]

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Note also that the website has a great site for students to independently research the effects of inflation and deflation on a country <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(just click on [|inflation island] )