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Explain how monetary policy can be used to control the performance of the UK economy (10)
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Explain how monetary policy can be used to control the performance of the UK economy (10) Monetary policy involves changes in the base rate of interest and the money supply (effectively the amount of bank credit available for borrowing). The aim is to influence the rate of growth of aggregate demand and thus inflation. The government's four main objectives are low and stable inflation, low unemployment, maintaining current account equilibrium and high but stable economic growth. The main objective of monetary policy is to control inflation. Since 1997 the Bank of England has been given operational responsibility for monetary policy. The current target for inflation set by the government using the CPI measure is 2%, although it is allowed to deviate 1% either way of the central target. Higher interest rates will reduce inflation because they reduce consumption and investment. This is because the opportunity cost of saving has increased so consumers...
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