The Importance Of Interest Rates In The UK

Interest rates are the amount charged and expressed as a percentage by a lender to a borrower for the use of assets. Interest rates are typically determined on a annual basis, known as the annual percentage rate. Examples of assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest rates are determined by the bank of England this is because retail banks are usually the first financial institutions to expose money to the economy, they are the primary instruments used by the central bank (bank of England) to manipulate the money supply. There are many ways in which Interest rates effect the UK economy examples of this are price of borrowing, mortgage interest payments, the value of the pound …show more content…
Problems with monetary base control is that assume that authorities decide to control narrow money such as notes and coins, this could be done by imposing a statuary cash ratio on banks. There are serious problems with this form of monetary base control. One of these problems is that banks hold cash in excess of the statutory minimum therefore they could respond to any restriction of cash by authorities by simply reducing their cash ratio towards the minimum rather than having reduced credit. However unless cash ratio were imposed on every single financial institution, the institutions lending would only shift business to other uncontrolled institutions, including globally. If banks operated in a global market then UK banks can do business with UK borrowers using money markets abroad, thereby diverting a profitably business away from London and this is a good example of Goodhart 's Law. Alternatively if those banks focus on statutory cash requirements were of short cash then they would attract away from uncontrollable institutions. Conversely the diversion of business away from financial institutions that are subject to control is known as disintermediation, to avoid this is to use monetary base control with statutory cash ratio. There are …show more content…
The Keynesian position demonstrates that fiscal policy is more effective than monetary policy in controlling aggregate demand. As we see above in graph A it shows a bigger increase in the national income with expantory fiscal policy than it does in graph B with expansionary monetary policy. This suggest that monetary policy is weak as an increase in money supply leads to major increased idle balances and thus only a small fall in interest rates overall and a small downfall in the LM curve. To add one of the major criticisms of the policy is that it leads the economy to as overall downfall. An example of this is that say there is rise in inflation then that means there will be a rise in price levels generally. Furthermore this means there will be a reduction in real purchasing power, therefore consumption will be depreciated and then lastly the overall economy growth falls. So to critically analyse these theoretical points we have to decide if they have actually happened in the real word? No because as we see in economic theory it doesn 't happen in real life Macroeconomy and this is why we haven 't seen it occur in the real world