The Monetary Policy Transmission Mechanism and Its Evaluation

Tick each line you got. Your score builds from the marks on the scheme.

• identifies that a cut in Bank Rate lowers the interest rate commercial banks charge on loans and mortgages and pay on savings.1 mark
• explains that cheaper borrowing raises consumption, as the cost of servicing debt falls and saving becomes less attractive.1 mark
• explains that cheaper borrowing raises investment, as the cost of finance for firms falls and more projects become profitable.1 mark
• explains the exchange rate channel, that lower UK interest rates make sterling assets less attractive, depreciating the exchange rate.1 mark
• explains that a depreciation makes UK exports cheaper abroad and imports dearer at home, raising net exports (X minus M).1 mark
• correctly links the rise in C, I and (X minus M) to a rightward shift of aggregate demand.1 mark
• uses or describes an AD/AS diagram to show that the rightward shift of AD raises real output, other things being equal.1 mark
• a developed final point, e.g. that the size of the growth effect depends on how much spare capacity exists in the economy.1 mark

Nothing ticked yet - 8 available

Tick each line you got. Your score builds from the marks on the scheme.

• basic, undeveloped points about interest rates and spending, with little or no reference to the transmission mechanism or the specific context of below-target inflation.5 marks
• one or more chains of analysis correctly applied, for example cheaper borrowing raising consumption and investment, and/or a weaker exchange rate raising net exports, with some AD/AS diagram reasoning, but with limited evaluation.5 marks
• developed chains of analysis combined with evaluative comment on at least one axis, such as time lags, the size of the effect, or the state of the economy, showing why the policy might or might not raise inflation back towards target.5 marks
• sustained, balanced evaluation across multiple axes, for example time lags of around one to two years before the full effect is felt, the size of the effect depending on the proportion of variable-rate versus fixed-rate mortgages, the risk of a liquidity trap if confidence is very weak, and the unintended redistribution from savers to borrowers, leading to a supported judgement on how effective the cut is likely to be.5 marks
• Credit content on: the market rate, asset price, exchange rate and confidence channels; correct use of an AD/AS diagram showing a rightward shift of AD; the Bank of England's own estimate that the full effect takes time to work through the economy; recognition that a cut is less effective in a liquidity trap or when confidence is very low; and a final judgement that directly answers the question.5 marks

Nothing ticked yet - 25 available