Monetary policy and fiscal policy can defined as demand-side policy, both seek to influence AD. Monetary policy include the rate of interest, money supply and exchange rate.
A low interest rate tends to encourage people to save less and consume more, and companies to invest more as it is cheap to borrow. If it is high interest rate, people in foreign country tends to place more their money in UK financial institution to gain high interest in return.Therefore, the demand for pounds increases, push up the value of pound, thus rise in exchange rate. When exchange rate increases, SPICED. Imports cheap and export dear. There is a likelihood to cause current account deficit ( money leaving the country exceed money coming into the country).In turn, Monetary policy can be used to adjust the position of current account of balance of payment.
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"There is a likelihood to cause current account deficit ( money leaving the country exceed money coming into the country"
ReplyDeletewhy?
When exchange rate increase, imports are cheap, people might spend more on imports, therefore money is going out of country. And exports expensive, people in other country might not want to buy it, therefore, money come into the country is less.
ReplyDeleteso with high interest rates people spend more?
ReplyDeletestill behind...
http://efbusinesseconomics.blogspot.com/2009/03/sociology-homework_15.html
I think people spend less, but the same time, people have to spend as well and they will spend more on imports since it is cheap.
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