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What should the MPC do to ensure that inflation is kept within the 2% target?

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Introduction

"The voices which... tell us that the path of escape is to be found in strict economy and in refraining, wherever possible, from utilising the world's potential production are the voices of fools and madmen." These are the words spoken by John Maynard Keynes during the most tumultuous period of the Great Depression. It is clear to me that the monetary policy committee (MPC) of our day are resolute in not repeating the same mistakes as those 'fools and madmen' who failed to heed Keynes' advice in the past. The Governor remarked in the August 2008 foreword that the world stimulus package has been 'extensive'. At home, the MPC announced their own plans of 'asset purchases totalling �175 billion' and keeping the interest rates 'at almost zero' (0.5%). The objective of this plan is fairly straightforward: by increasing the supply of money, the rate of 'nominal spending' should also increase, which in turn, would result in a higher level of aggregate demand (as consumption makes up 65% of aggregate demand) ...read more.

Middle

However, it should be noted that according to Charcol (the UK's foremost independent mortgage advisor), that fixed rate mortgages in the "past month have accounted for just 34% of all mortgages taken out". This elucidates that fixed-rate mortgages are clearly losing popularity and that it would be a good idea to maintain the interest rate at 0.5% as it increases spending power of the other 66% of people, helping to increase inflation to 2%. Lowering of interest rates has also helped companies export goods as the value of the pound sterling is lower and therefore more competitive in these lean times. Cheapening the price of UK manufactured goods abroad is beneficial as it increases net exports (another component which can positively change aggregate demand, and thus increase inflation). I agree with the Bank of England's decision not to have decided against any further reductions as I feel that they are unlikely to boost demand and inflation substantially. ...read more.

Conclusion

Overall, I agree with the �175 billion stimulus package as there is a strong likelihood that the supply of money will be increased for the public. The resultant spending and investment could then result in the inflation level picking up and meeting the 2% target, which is imperative for our country to achieve in order to get back onto the path of recovery. In my firm opinion, it is essential that the monetary policy committee reverse quantitative easing when the good times begin to roll once more. From the Governor's foreword, he mentions how "the Committee is very conscious that at some point this extraordinary degree of policy stimulus will need to be withdrawn", which shows that the plan will be practised as safely as possible. ?? ?? ?? ?? What should the MPC do to ensure that inflation is kept within the 2% target? ...read more.

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Here's what a star student thought of this essay

4 star(s)

Response to the question

This essay engages with the question strongly. There is a clear critical voice here, and arguments are backed with confidence. I do feel there is a slight lack of analysis here, and the policies available to the MPC aren't explained ...

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Response to the question

This essay engages with the question strongly. There is a clear critical voice here, and arguments are backed with confidence. I do feel there is a slight lack of analysis here, and the policies available to the MPC aren't explained fully. To ensure your insightful comments and perceptive debates are credited, you must make an effort to provide a foundation with clear analysis. I worry that an essay such as this, which makes some good arguments, would get penalised as there is little analysis. A diagram would help massively!

Level of analysis

The analysis here is sound. Although I was pleased to see Keynes quoted in this essay, I don't think starting an argument with a quote is the most effective. It would be better to weave in Keynes ideas into the analysis, showing your sophistication. I feel as if mechanisms are brushed over here, and not fully explained. For example "The reason behind the interest rates being kept at 0.5% has also been an attempt to boost consumer spending" is correct, but there is no full explanation of why low interests can drive spending. I would've liked to have seen investment discussed here, as low interest rates mean the opportunity cost to borrowing is less, promoting investment which should in turn boost aggregate demand. A diagram would be wise here, as you would then explain how too far an increase in aggregate demand will simply cause the price level to rise, putting upwards pressure on inflation. The poor section of this essay lies with the quantitative easing argument. You cannot claim "quantitative easing is heralded as the sole solution to the perils of deflation" without having first analysed how it works, or what it is trying to achieve. Unfounded comments such as those show weakness in building an argument, and won't gain any credit.

Quality of writing

The essay here feels a bit jumbled. I would've preferred to see a clear structure, progressing from a strong argument posted in the introduction to analysis of what can be done and then evaluation of what should be done. This essay chooses to look at interest rates, and then explain the two arguments and make a judgement to which one is more valid. This is fine, but in the case of this essay, where I am struggling to find a solid amount of analysis, it is best to separate the analysis and evaluation to make it clear. Spelling, punctuation and grammar are fine and technical concepts are used well.


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Reviewed by groat 12/04/2012

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