Monetary policy
Introduced| English | Meaning |
|---|---|
| borrowing/ˈbɒrəʊɪŋ/ | Obtaining money or resources from another party with an obligation to repay them. |
| interest rate/ˈɪntrest reɪt/ | The interest charged or paid over a period, expressed as a percentage of the relevant principal. |
| monetary policy/ˈmʌnɪtəri ˈpɒlɪsi/ | Actions by a monetary authority to influence interest rates, credit or money conditions in pursuit of economic objectives. |
| central bank/ˈsentrəl bæŋk/ | The institution responsible for a country's monetary policy and the management of its currency and banking reserves. |
| money supply/ˈmʌni səˈplaɪ/ | The stock of money available in an economy at a particular time, measured using a specified definition. |
| inflation target/ɪnˈfleɪʃn ˈtɑːɡɪt/ | A stated rate or range of price-level growth that monetary policy aims to achieve over a specified horizon. |
| investment/ɪnˈvestmənt/ | Spending on assets intended to provide future returns or increase productive capacity. |
The price of borrowing 借贷
- Change one number — the interest rate 利率 — and mortgages, business loans and savings all move with it.
- Steering that rate is the heart of monetary policy 货币政策.
Monetary policy is mainly carried out by the:
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The central bank sets interest rates and influences the money supply.
Monetary policy is mainly used to keep inflation near a target.
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Price stability is its primary goal.
The interest rate set by the central bank is called the ______ rate.
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The base rate guides all other interest rates.
Who runs it
- The central bank 中央银行 sets the base interest rate and influences the money supply 货币供给.
- It uses these to hit the government's inflation target 通胀目标.
The central bank runs monetary policy — it sets the interest rate to manage demand, inflation and growth
Monetary policy shifts AD
Lower interest rates encourage borrowing and spending, shifting aggregate demand right.
Lower interest rates tend to:
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Cheaper borrowing raises spending and investment.
Lower rates
- Cut interest rates → borrowing is cheaper, saving less rewarding.
- Spending and investment 投资 rise → demand, output and jobs grow (but inflation may rise).
To reduce inflation, a central bank would usually:
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Higher rates cool demand and slow price rises.
Higher rates
- Raise interest rates → borrowing is dearer, saving more attractive.
- Spending and investment fall → demand cools and inflation slows (but growth may slow too).
Worked example. With inflation above target, the central bank raises the base rate. Mortgage and loan repayments rise, households spend less, and price rises ease — at the cost of slower growth.
You've got it
- monetary policy = the central bank setting interest rates / money supply
- lower rates boost borrowing and demand; higher rates cool them
- it is mainly used to control inflation