Monetary Transmission Mechanism Flashcards

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What is the monetary transmission mechanism?

It is how a change in the Bank of England's Bank Rate spreads through the economy to affect spending and inflation.

Banks and building societies change the interest rates they charge on loans and pay on savings.

Loans and mortgages cost more, so people borrow less and save more, cutting their spending.

Borrowing is dearer and profits may be lower, so many firms delay or reduce investment.

Higher UK rates often attract money from abroad, so the pound tends to rise; lower rates can make it fall.

UK exports become dearer abroad and may fall. Imports become cheaper and may rise, so net exports drop.

Higher rates can lower house and share prices, so people feel less wealthy and spend less.

Monthly payments go up, leaving less income to spend on other goods and services.

A rate rise can make people and firms cautious, so they plan to spend less. A cut can boost confidence.

Consumption, investment and net exports fall, so AD falls.

It tends to lower inflation by slowing growth in demand.

No. They build up over time and can take up to about two years to be fully felt.