The central bank usually controls the money supply, such as … making connections across different aspects and topics in your course. 2.4 Fiscal Policy: The government budget . This column reviews empirical evidence on how monetary policy affects bank stability, focusing on unconventional monetary policy … Evaluation of monetary policy Small time lag (especially in countries where the use of credit cards is high. For the data response activity, there is a choice between an AQA-style and an Edexcel-style data response. Others are based on short videos, including activities for you to think about and try at home, as well as some extra worksheet-based activities. Recap the reason behind the policy implementation, the intended effect of the policy, and summarize your evaluation … importance of in-depth evaluation for your IA. No crowding out: it does not borrow large sums of money which reduces the amount of private sector borrowing and so interest rates will not increase due to this, when they are intended to fall. Evaluating the Effectiveness of Monetary Policy During Recessions. Monetary policy and inflation targeting: Explain that central banks of certain countries, rather than focusing on the maintenance of both full employment and a low rate of inflation, are guided in their monetary policy by the objective to achieve an explicit or implicit inflation rate target. Thank you to Peter McGinn and Jon Clark for their contributions to this lesson. Potential for exports. Inflation targeting and evaluation of monetary policy . You may want to take a look at the lesson introducing monetary policy and the lesson for quantitative easing first. The central bank uses the following in order to adjust the money supply: The base rate: the rate of interest the central bank charges on loans to the commercial banks. When the policy rate is below the neutral rate, the monetary policy is expansionary. Contractionary fiscal policy – decreasing government expenditure and/or increasing taxes to decrease aggregate demand. No politics: most central banks are independent from the government, so political desires about ensuring votes will not impact on the monetary policy. We anticipate that the "core" of the lesson would take around one hour, with an extra 90 minutes for the written tasks. The price of bonds depends on the demand and supply on the day – they are traded on the stock exchange. If you would like to download a simple PDF worksheet to accompany the video activities, you can download it here: Evaluating Monetary Policy. The effectiveness of these policies, however, depends on just how responsive the private sector is to decreases in the interest rate initiated by the central bank. A decrease in interest rates is a common response to a … Some are interactive game-based activities, designed to test your understanding and application of monetary policy. to decide on monetary policy. Greater political stability. Inflation targeting: the central banks of certain countries, rather than focusing on the maintenance of both full employment and a low rate of inflation, are guided in their monetary policy by the objective to achieve an explicit or implicit inflation rate target. The demand for money is due to the desire to buy goods and services and to hold it as assets. 2. Strengths of the monetary policy: 1. before elections they might like to decrease interest rates to inflate growth figures and take the credit) 2. In this online lesson, we cover some of the key approaches for evaluating the effectiveness of monetary policy. LS23 6AD, Tel: +44 0844 800 0085 This is designed to increase aggregate demand in the economy by increasing the money supply and reducing interest rates. It guarantees the holder the repayment of the money, on a given date, with fixed annual interest. Conclusion. An appropriate monetary policy by adjusting money supply to the needs of growth, directing the flow of … Monetary policy deals with the discretionary control of money supply by the monetary authorities in order to achieve the desired economic goals. Used in attempts to close deflationary (recessionary) gaps. quantative easing). For the last decade or so, changes to Bank Rate have not been as effective as they had been in the past. ACTIVITY 3: GAME - MULTIPLE CHOICE QUESTIONS. The central bank is the lender of last resort, so loans to commercial banks when they cannot meet demands for consumers’ funds. To decrease money supply and increase the interest rate, the government will: Sell bonds to banks, so banks have less to lend, Increase savings, as there is a higher reward, Decrease consumption, as there is more incentive to save and real income decreases as mortgages and loan repayments become more expensive. Lower interest rates will increase consumption and investment which are components of AD. Expansionary/Reflationary/Loose monetary policy. Check your knowledge in this quick review video. IB Syllabus Requirements: The government budget. Reserve requirement: the central bank controls the amount of money that the commercial banks have to keep on deposit to meet the needs of their customers, in the UK it is 20% of the customer’s savings. The IB Diploma Programme economics course emphasizes the economic theories of microeconomics, which deal with economic variables affecting individuals, firms and markets, and the economic … Teacher. The expansionary monetary policy is successful because people and corporations try to get better … ACTIVITY 5: READING AND THINKING TIME - INFLATION TARGETS. The Federal Reserve or the Fed, and other central banks, trade in … Author: Mahmoud Salha 21/07/20. In this Higher or Lower game, build your knowledge of how different economies approach inflation targeting. You can find suggested answers to the AQA DR here and to the Edexcel DR here. Higher interest rates will decrease consumption and investment which are components of AD. For instance NatWest will have an interest rate from mortgages above the base rate, but if the base rate, which they are charged, increases then they will also increase the interest that they charge. ACTIVITY 2: VIDEO - MONETARY POLICY KEY TERMS. The Bank of England has produced a number of reports which aim to compare and contrast different approaches to monetary policy. The interest rate on your credit card falls/increases and that might change your consumption right away.) Fax: +44 01937 842110, We’re proud to sponsor TABS Cricket Club, Harrogate Town AFC and the Wetherby Junior Cricket League as part of our commitment to invest in the local community, Company Reg no: 04489574 | VAT reg no 816865400, © Copyright 2018 |Privacy & cookies|Terms of use, in-depth explanation of inflation targeting from the IMF here, this article from the Federal Reserve Bank of San Francisco, Download this tutor2u Synoptic Assessment Mat, download this Edexcel-style data response, Evaluating the effectiveness of inflation targeting as a tool of monetary policy, Evaluating the impact of monetary policy on economic performance. Speed: monetary policy can be enforced far more quickly than fiscal policy. More choice. Download this tutor2u Synoptic Assessment Mat to help you practise this skill in relation to monetary policy. Monetary policy involves the actions by central banks, such as the U.S. Federal Reserve, to regulate a nation’s supply of money. Banks will often pass on interest rate … The interest rate transmission mechanism has broken down in parts. Abhinav. his paper focuses on comparing credit easing with quantitative easing, Macroeconomic Policy Revision (Online Lesson), Introduction to Monetary Policy (Online Lesson), Fiscal and Monetary Policy - Connection Wall Activity, The Government Game - Economic Simulation Activity, Macro policies to prevent an economic depression, Benefits and Costs of High Inflation for a Government, Macro Policies to avoid an Economic Recession, Exchange Rates: Impact of QE on the value of a currency, Synoptic economics: Micro and Macro Effects of a rise in Interest Rates, Economic Effects of Higher Interest Rates (Revision Essay Plan), Advantages and Disadvantages of Quantitative Easing (QE), Advantages and Disadvantages of Higher Interest Rates, Bank of England preparing ground for negative interest rates, Bank of Jamaica Inflation-Targeting Dubplate for 2020, From our Economics Correspondent: The state of the UK economy in 2025 [Year 12 Enrichment Task]. Evaluation of the monetary policy Unlike the fiscal policy, the monetary policy is actually relatively immune to political interference and so it can work solely on achieving the desired macroeconomic … Conclusion (75 words) – concludes your main ideas in 2-3 sentences. Monetary Policy - Evaluation. Used in attempt to close inflationary gaps. If the base rate decreases, commercial banks lower their interest rates so loans are less expensive and with more loans the money supply increases and interest rates across the whole economy falls. However, this point is highly debatable! ACTIVITY 4: VIDEO - BREAKDOWN OF THE TRANSMISSION MECHANISM. Boston House, ACTIVITY 7: VIDEO - UNCONVENTIONAL MONETARY POLICY. Increase investment, as borrowing to fund it is less expensive. The central bank determines the level of supply in attempt to change interest rates. You could also read this opinion piece from CNBC, which considers whether inflation targets should be scrapped in light of the impact of COVID-19. Deflationary Fiscal Policy – impact on the economy of raising taxes and cutting spending. 7 . The central bank sets the base/discount rate, which in turn influences the interest rate charged by financial institutions. Fiscal policy: the use of government spending and taxation to influence the level of economic activity.. Sources of government revenue: primarily from taxes … … Evaluation of the effectiveness of monetary policy to increase aggregate demand. Unresponsive to change in interest rates: the demand for funds might be unresponsive if it is interest inelastic, meaning that a change in interest will have relatively little impact on the AD. We've put together a data response set of questions that you could tackle. Much cheaper & more effective than TES or the Guardian. Further Reading on Fiscal Policy. Very low interest rates: when interest rates are very low, or close to zero, it is not possible to reduce the interest rates further, so other policies are needed (e.g. Monetary policy is a type of demand-side policy, as it helps the government achieves its macroeconomic objectives by changing AD. An effective way of learning how to write good essays is to read essays that would be awarded high marks in an exam and then analyse the reasons why they would be awarded high marks. Additional teacher guidance is available at the end of this lesson. You can print it off and annotate it for your own notes, or make your own notes on a separate piece of paper to add to your school/college file. © 2015 by IB Study. To increase money supply and decrease the interest rate, the government will: Buy bonds from banks, giving the commercial banks more money to lend. The best way to work out how well you've understood the material in the online lessons on monetary policy is to have a go at some exam-style questions! Increased foreign investment. Test yourself against the clock with these MCQs on monetary policy. Conflicting goals: a deflationary monetary policy designed to reduce inflation can lead to slower economic growth and demand deficit unemployment. Measuring inflation and the impact on our everyday lives, Unintended consequences of inflation targets, Resources from the Reserve Bank of Australia, How the Fed Works: After the Great Recession, How the US Federal Reserve sets interest rates, Why the Bank of England has raised interest rates, Interest Rates - play the 'Reach the Peak' Activity, The absurdity of controlling inflation by adjusting interest rates, UK interest rate rise a sign of economic healing, International Institutions (Online Lesson), Correcting Balance of Payments Imbalances (Online Lesson), Introduction to the Balance of Payments (Online Lesson), International Competitiveness (Online Lesson), AQA A-Level Economics Study Companion - Microeconomics, AQA A-Level Economics Study Companion - Macroeconomics, Advertise your teaching jobs with tutor2u, A review of the main types of macro policy and key aspects of monetary policy, Evaluating monetary policy and its effectiveness by looking at why the interest rate transmission mechanism may not work in practice, The need for alternative monetary policy approaches, around 30 minutes of guided video, spread over 5 videos, and supported by an accompanying worksheet, around 20-25 minutes of student thinking time and activity, spread throughout those 5 videos, an independent reading and ranking activity on inflation targeting, which could take students anywhere between 15 minutes and 1 hour, depending on their level of involvement, 2 interactive games testing their application and knowledge of monetary policy, a synoptic thinking activity (solutions available within the activity download), an essay-based activity, in which 2 example essays on monetary policy are provided (along with some examiner commentary) and students need to consider the strong features of these essays. Contractionary/Deflationary/Tight monetary policy. Your task is to i) organise the statements into advantages and disadvantages ii) rank those statements from "most convincing" to "least convincing". 1 . Monetary policy involves altering base interest rates, which ultimately determine all other interest rates in the economy, or altering the quantity of money in the economy. Follow along in order of the activities shown below. Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded. Business and consumer confidence: if confidence is low even low rates of inter will not encourage them to borrow to finance investment and consumption, as they may believe that in the future they will not be able repay the loans. Tip #5 in this article does a deep dive into all the essentials of the perfect evaluation 5. This is designed to decrease aggregate demand in the economy by decrease the money supply and increasing interest rates. The study examined an evaluation of monetary policy in Nigeria and its impact on economic growth. In this online lesson, we cover some of the key approaches for evaluating the effectiveness of monetary policy. You can have a go at this for the following two essays: Jot down some notes on the key features of these essays, and try highlighting the aspects of the essay that you might not have thought to include yourself if you had tackled that essay title. Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC. In your A level exams, you will need to be able to use your economics in a synoptic way i.e. Finally, download this tutor2u resource On Target. You can follow this up with a slightly more in-depth explanation of inflation targeting from the IMF here. Ruth is passionate about boosting the quality of teaching and learning across all subjects in schools and colleges. If you are doing AQA Economics then download this AQA-style data response. It cold be seen that money policy … The interest rate: the reward for saving and the cost of borrowing money, which is the price of money. She is also a Senior Examiner. The evaluation of monetary system. Decrease investment, as borrowing to fund it is more expensive. Before we can address some of the key evaluation points for monetary policy, it's important to make sure that the essential monetary policy terminology is spot on! Test yourself against "The Cube" in this quick review activity of the different types of macro policy. Many economists argue that altering exchange rates … Monetary policy: A ‘ tightening of monetary policy’ involves the central bank introducing a period of higher interest rates to reduce consumer and investment spending Higher interest rates may cause … You may want to take a look at the lesson introducing monetary policy and the lesson for quantitative easing first. More specifically, the study sought to assess monetary policy and economic growth in Nigeria. 4. On the 2nd page, you will find a series of statements regarding inflation targeting as a monetary policy. The supply of money is not dependent on interest rates as it is determined by the central bank. an evaluation of the impact of central bank of nigeria monetary policy on the development of the nigerian economy by adam, muhammad danladi mba/admin/41920/2004-200s (g04/bamf /7007) … This video introduces you to some of these unconventional approaches to monetary policy. Federal … Please advise your students which is the most appropriate for them, especially if you follow a different awarding body specification. Expansionary fiscal policy – increasing government expenditure and/or decreasing taxes to increase aggregate demand. Boston Spa, Monetary Policy is often employed during recessions to try and stimulate aggregate demand by reducing interest rates in the banking system. Independence of the central bank means politicians are unable to influence its decisions (e.g. From the 1990s onwards, a number of Central Banks decided to introduce inflation targets as part of their monetary policy approach. Decrease savings, as there is a lower reward, Increase consumption, as there is less incentive to save and real income increase as mortgages and loan repayments become less expensive. Greater efficiency. ACTIVITY 9: VIDEO - GENERAL EVALUATION POINTS FOR MONETARY POLICY. Greater size of the market. Evaluating Monetary Policy (Online Lesson) Levels: AS, A Level, IB. The response of major central banks to the Global Crisis has rekindled the debate on the interactions between monetary policy and financial stability. Evaluation of Monetary Policy in reducing inflation- 4 If inflation is due to cost push factors (rising oil prices) we get higher inflation and lower output- difficult to solve both cost push inflation and lower … All students preparing to sit A-Level Economics exams in summer 2021. Evaluation of US expansionary fiscal policy in 2009. Alternative monetary policy strategies that reduce the frequency and severity of ELB recessions mitigate the adverse consequences of economic inequality, which then enhances the resilience of the economy to economic disturbances. Evaluation of monetary policy • Evaluate the effectiveness of monetary policy through consideration of factors including the independence of the … ACTIVITY 1: VIDEO - REVIEW OF THE TYPES OF MACRO POLICY. This video activity takes you through some of the reasons for this. Fiscal constraints on monetary policy For much of the past three decades, fiscal policy remained a major concern for monetary policy in EMEs. 2.5 Monetary policy: Interest rates . Could a cashless economy help central banks to use negative interest rates? Ruth has been an enthusiastic Head of Economics and Politics for many years, having taught in a variety of schools and at university level. Free trade among members but discriminatory policies against non-members which might not lead to global economic integration. Next, take a look at this article from the Federal Reserve Bank of San Franciscoon the pros and cons of inflation targeting. This transcript of a speech for the ECB considers why some commentators have regarded recent monetary policy as ineffective, and attempts to explain why they are wrong. In this final video for this lesson, we take you through some of the wider evaluation points for monetary policy. Interest rates as a tool of monetary policies. 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