Inflation, the sustained rise in the average level of prices, is a natural and necessary part of every economy (Boyes and Melvin). The amount of money in circulation within an economy has a direct relationship to the inflation rate. Too much money in circulation results in a higher inflation rate, and too little results in a lower one. It stands to reason, then, that there is a level of inflation that is the most conducive towards promoting a healthy economy. England
There are a couple of tools that the Bank of England uses to help steer their economy towards a 2% rate of inflation. The first step the Bank takes is to raise or lower interest rates. If inflation is expected to be higher than 2%, interest rates will be raised. This in turn makes borrowing less attractive, saving more attractive, and lowers the amount of money in circulation. Eventually, this will lower the level of inflation. The opposite is done if inflation is not expected to reach the 2% target.
The second tool used by the Bank of England is used when the interest rate cannot be lowered any more. Since the goal of a lower interest rate is to promote borrowing and spending, and make saving less attractive, the Bank can inject money directly into the economy; this is called Quantitative Easement (Quantitative Easing Explained). No new bank notes are printed in the Quantitative Easement process; the Bank simply buys stocks and government bonds and puts cash directly into the economy.
Through monitoring and constant fluctuation, the Bank of England uses the interest rate and quantitative easement to push England
Word Count: 299
Works Cited:
Boyes, William, and Michael Melvin. Macroeconomics. 7. Canada
"Bank of England England
You tied the class material to your post quite nicely. The economic tools can be rather intriguing - primarily, they seem to be very reactive and designed to incur immediate public reaction. Let's hope that two percent is working out for them.
ReplyDeleteI agree with Zac; it goes well with our class discussions.
ReplyDeleteI find it interesting that both the US and England use the same method to help keep inflation in check (ours, of course, being the Fed). Never having studied economics before, I am curious if this is the way that all economies work in the different countries.
I still wonder who does the deciding of what a 'proper' inflation rate should be and what is used to make that call.