The Impact of Monetary Policy on Macroeconomic Objectives (Edexcel IGCSE Economics)

Economic growth

• Economic growth slows down as loans get more expensive

• Consumers and firms are less likely to borrow money. leading to a decrease in total demand

Low and stable inflation

• Higher interest rates ease inflationary pressure as economic activity contracts

• However, borrowing may continue if consumer and business confidence are high

Low unemployment

• Unemployment may increase as output is falling and fewer workers are required

Stable current account on balance of payments

• The Current Account is likely to worsen as both exports and imports decrease

  • Exports are more expensive and imports cheaper, but households have less income for imports

Economic growth

• Economic activity increases as loans get cheaper

• There is an incentive to borrow money by consumers and firms

  • This is used for consumption by households and investment by firms, leading to an increase in total demand

Low and stable inflation

• Extra money supply may lead to rapid inflation

• As the supply of money increases, interest rates decrease and there is is more demand for loans

  • This can inflate asset prices (houses) in the long term 

• The interest rate has limitations on downward adjustment

  • The closer it gets to zero, the less effective changes are

Low unemployment

• Unemployment is likely to fall as a result of more consumer borrowing and spending

• Firms increase output to meet demand and more workers are required

Stable current account on balance of payments

• Inflation causes higher price levels

• Higher price levels increase the price of exports, reducing foreign demand

• Demand for imports may increase as households have more money to purchase foreign goods