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Applied Economics - Essay Example

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Explain how the Bank of England tries to manage inflation and discuss whether the Quantitative Easing Programme may cause higher inflation in future. Name Tutor Institution Subject code Applied economics Introduction The Bank of England is the central bank of the United Kingdom established in 1694 and nationalized on the 1st of March 1946…
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Applied Economics
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Applied Economics

Download file to see previous pages... An independent Monetary Policy Committee was launched in 2012 as a subsidiary of the bank to take relevant action in order to eliminate or reduce operational risks with a mission of leveraging and increasing the resilience of the UK financial system (Buckley & Desai, 2011). The committee is also charged with supporting the economic policy of the government. Managing inflation Types of inflation Demand-Pull Inflation In demand-pull inflation, inflation is solely caused by increases in aggregate demand. This inflation develops when the household, government, business and foreign sectors together try to purchase more output than the economy is able to produce. Demand pull inflation results when aggregate demand increases beyond aggregate supply causing shortages in the economy. This type of inflation is can be sustained with an increase in the monetary base (Buckley & Desai, 2011). Cost-Push Inflation In, cost-push inflation, inflation results from decreases in aggregate supply due to increases in cost of production. This type of inflation arises when the cost of using labor, capital, land, or entrepreneurship rises. This means that the production possibilities edge is reducing in size closer to the origin, causing it to bump down against the aggregate demand. The eventual result is inflation. ...
Expansion of fiscal and monetary base cause excess demand and as a result, inflation increases. One of the key responsibilities of the bank of England is maintaining monetary stability. This means low inflation, stable prices and confidence in the UK currency. Price stability is defined by the inflation target set by the government, which the bank aims to meet by the decisions taken by the Monetary Policy Committee. The Monetary Policy Committee is a committee that consists of nine experts who meet every month at the bank to discuss and review the performance of the economy and decides on the most effective way to set the monetary policy to achieve the rate of inflation of 2% set by the government (2012). This committee votes on the bank rate at its meetings and decides whether it is wise to employ quantitative easing or not, and if so, how much money should be injected into the economy. The monetary policy committee makes its decision independently without the intervention of the government (Toporowski, 2012). The principal aim of the bank is to protect the value of the currency based on what it is able to buy-an increase in prices implies inflation, which lowers the value of the currency. The monetary policy is created to achieve this aim and developing a structure for non-inflationary economic growth. The monetary policy of the bank of England controls inflation by influencing the interest rate at which money is lent and through quantitative easing (QE)-injecting money directly into the economy by buying assets. This implies that the banks mechanisms of managing inflation through monetary policy budges towards the quantity of money availed in the economy rather than the interest rate at which the bank borrows or lends money to ...Download file to see next pagesRead More
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