Wars and Interest Rates in the United Kingdom, - Essay Example

Wars and Interest Rates in the United Kingdom Mankiw gives an insight into the relationship that exists between interest rate and other macro-economic variables. With a view to the economic turbulence that United Kingdom has gone through especially during the wars in Europe between 1730-1920. It is important to note that interest rate is a common denominator as far as monetary and fiscal policies are concerned. Different schools of thoughts explain the feasibility of either monetary policy of fiscal intervention towards regulation of interest rate which in turn dictates level of investment versus savings.

The classical approach takes investment to be a function of interest rate directly whiles the Keynesians economists note this relationship to be a product of multiplier effect (Mankiw 73). There is significant evidence that the UK economy in the 1920s was emphatic on the desire to maintain the value of Sterling at its pre-war level of $4.86. This political move survived during the war but at the end US dollar gained prominence leading to significant inflation. It is explained that inflation affects interest rates since it raises general prices of goods and services.

The case of United Kingdom during the specified period that was marred with war gives a clear picture of the influence of interest rate in the aggregate economic direction of the country. Macroeconomic policies on fixed exchange rate policy indicated that fiscal instruments are at play. Mankiw generally discusses the significance of interest rate in determining level of investment and subsequent rate of economic growth.Work citedMankiw, N G. Principles of Macroeconomics. Mason, OH: South-Western Cengage Learning, 2014. Print.