• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

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

Extracts from this document...

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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level UK, European & Global Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

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 ...

Read full review

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.


Did you find this review helpful? Join our team of reviewers and help other students learn

Reviewed by groat 12/04/2012

Read less
Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level UK, European & Global Economics essays

  1. Marked by a teacher

    Is Increased globalization a good thing?

    5 star(s)

    individual country to choose the particular set of policies that suits its own development needs. Additionally, globalisation has not been experienced everywhere to the same extent. In fact, it is probably only applicable to a small percentage of humankind. For instance, only a small minority of the world's population can

  2. Why was Britain the First Industrial Nation?

    This was due to the free internal trade in Britain, unlike Europe, where a merchant would have to pay tax when crossing the border of a country. The British Government used a 'Laissez- Faire' policy on its country; in other words the Government just let England be, and kept it a united, stable and peaceful country.

  1. 'Anarchy is what states make of it' (A Wendt) Do you agree?

    The behavior of the state in this self seeking egotistical manner is understood to be merely a reflection of the people that comprise the state.1 It is only human nature to want to win and to dominate, and it is this human nature that apparently explains why international politics is necessarily power politics.

  2. What are the main determinants of industrial location?

    The presence of scale economies encourages firms to choose only one location, and the presence of trade costs encourages them to locate in the country that has the larger market for their goods. According to Krugman it is determined primarily by the size of the labour force in a particular country, while assuming that labour force is immobile across countries.

  1. Free essay

    does uk housing market warrant government intervention

    Equally changes in government policy can have very large impacts. The effects of expectations, Expectations of changes in fundamental variables, including policy change, impact heavily on house prices. If in addition demand depends upon the observed change in price, or especially the rate of change in price, the effect can be to generate 'overshooting'.

  2. Corruption and Globalisation - Both of them have been so pervasive in recent years. ...

    Since bribery takes place in secret, access to market is artificially set, therefore it excludes competitive forces that could have put pressure for setting competitive quality and price. Many international companies have started including CPI has yet another variable along with economic risk and political risk in evaluating countries for investing.

  1. Where does the World Trade Organisation fit in the overall scheme of international public ...

    would be impossible to police, either domestically or through the WTO, and would be subject to rampant abuse. This happens already through the WTO's almost unconditional sanction of protection through anti-dumping duties (in Article VI GATT); a social-cum-development safeguard clause would make matters much worse.

  2. Write a written report on Globalisation

    These developments cut the costs of International trade and facilitated globalisation. Transport Developments in transport technology have played a major role in globalisation. Transport for personal use has improved dramatically making it easier for businesses to reach and communicate easily with one another.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work