Monetary Policy - Inflation - Cures
Worksheet - Inflation - what's the cure?
The purpose of this worksheet is to look at the principal cures for inflation. It aims to establish what the possible policies are and in what circumstances it may be appropriate to use them.
1. Write a short paragraph about targeting inflation. Try to mention the following in your answer:
- How long have we had an inflation target?
- What is the current value of the target?
- What is the purpose of an inflation target?
- What is the difference between an intermediate and final target?
- How does a target help reduce inflation?
(6 Marks)
2. What different techniques are available to help control money supply growth?
a)
b)
c)
(6 Marks)
3. Some countries choose to set reserve requirements as part of their monetary policy to help control money supply growth. Cross out words in bold in the paragraph below, so that it reads as a correct explanation of how reserve requirements work.
A reserve requirement means that a bank has to place a proportion of their assets / liabilities with the central bank. These deposits will often be interest-bearing / non interest-bearing. If the central bank increase the reserve requirement, this will have the effect of making the banks increase / reduce their deposits with the central bank. This means that their liquid assets have increased / reduced and makes them more / less likely to lend. This should have the effect of increasing / reducing the rate of money supply growth.
(6 Marks)
4. What is included in the monetary base?
(2 Marks)
5. How can the monetary base be used to control the money supply?
(4 Marks)
6. For each policy / event given in the table below, say whether it is likely to increase or reduce inflationary pressure. In the last column say whether it will mainly affect the demand-side or the supply-side of the economy.
| Policy / Event | Increase or reduce inflationary pressure? | Demand-side or supply-side of the economy? |
|---|---|---|
| The Monetary Policy Committee reduce the level of interest rates. | ||
| The government introduces significantly improved training schemes for all unemployed. | ||
| The development of a new chip technology leads to rapid technological growth. | ||
| There is an increase in the monopoly power of trade unions. | ||
| The government increase income tax rates for basic and higher rate taxpayers. | ||
| In the Budget there is a significant increase in the level of income tax allowances. | ||
| The exchange rate depreciates significantly. | ||
| The government introduce in a Budget significantly higher capital allowances for firms when investing. |
(16 Marks)
7. Use the blank axes below to show (using aggregate demand and supply analysis) how demand-side and supply-side policy changes can be used to reduce inflation. Write a short explanation of how the policies work below each diagram.
(6 Marks)
8. Imagine that you are an economist advising the Monetary Policy Committee. What would you be advising the MPC to look at before making their decision? Try to consider the following in your answer:
- Demand-side pressures - where do they arise from? What might indicate how strong they are? What measures are available to look at?
- Supply-side constraints - what effect does the supply-side have on inflation?
- What policies may be appropriate?
(6 Marks)
9. Use the data section to collect the figures for the interest rate for the years given in the table below. You will need to use the following variable:
- ZCMG UK Base Rate (under monthly data)
| Year | Interest rate |
|---|---|
| 1986 | |
| 1987 | |
| 1988 | |
| 1989 | |
| 1990 | |
| 1991 | |
| 1992 | |
| 1993 | |
| 1994 | |
| 1995 | |
| 1996 | |
| 1997 | |
| 1998 | |
| 1999 | |
| 2000 | |
| 2001 | |
| 2002 | |
| 2003 | |
| 2004 |
In what years do you think that there might have been high inflation? (Think about where the interest rate may have been used to try to limit demand growth).
(2 Marks)
10. Now use the data section to collect the figures for the inflation for the same years. You will need to use the variable:
- CZBH UK Retail prices all goods and services
| Year | Inflation |
|---|---|
| 1986 | |
| 1987 | |
| 1988 | |
| 1989 | |
| 1990 | |
| 1991 | |
| 1992 | |
| 1993 | |
| 1994 | |
| 1995 | |
| 1996 | |
| 1997 | |
| 1998 | |
| 1999 | |
| 2000 | |
| 2001 | |
| 2002 | |
| 2003 |
Were you correct with the years you expected inflation to be higher? Why do you think there may be some differences?
(4 Marks)
11. What do the MPC consider the time lag between a change in interest rates and its full impact on inflation to be?
(2 Marks)
12. What year did the MPC start setting interest rates?
19 __ __
(1 Mark)
13. Use the In The News archive to look up recent stories and issues concerning inflation and fiscal and monetary policy. Write a summary below of recent fiscal and monetary policy changes.You may want to search on terms like:
- Inflation
- Retail Price Index
- Monetary Policy
- Fiscal Policy
- MPC
- Bank of England
N.B. When searching on search terms with more than one word it may be helpful to check the 'Match your phrase exactly' box to limit the search results.
(9 Marks)
Total Marks = 70
