Understanding Monetary Policy and Interest Rates in the UK

The video explains the role of the Bank of England in managing monetary policy to ensure price stability in the UK. It targets a CPI increase of 2% with a 1% leeway. The transition mechanism of base rate changes is discussed, highlighting how it affects inflation through savings, debt, and exchange rate channels. The video also covers how interest rate adjustments can influence aggregate demand and inflation, helping to stabilize the economy.

What is the primary goal of the Bank of England's monetary policy?

• To increase employment

• To achieve price stability

• To reduce government debt

• To control the stock market

How does a decrease in the base rate affect consumer behavior regarding savings?

• Consumers will invest in foreign currencies

• Consumers are more likely to save money

• Consumers are more likely to spend money

• Consumers will not change their behavior

What happens to the value of the pound when the base rate is decreased?

• The value of the pound remains the same

• The value of the pound becomes unpredictable

• The value of the pound decreases

• The value of the pound increases

If inflation is below target, what action is the central bank likely to take?

• Increase the base rate

• Focus on fiscal policy instead

• Maintain the current base rate

• Decrease the base rate

What is the effect of increasing interest rates when inflation is above target?

• It increases aggregate demand

• It decreases aggregate demand

• It has no effect on aggregate demand

• It only affects the stock market