Monetary policy is another tool tha

Monetary policy is another tool that governments use to control the economy. Monetary policy mainly involves making changes to the interest rate. It can also involve changing the amount of money that circulates round the economy. However, this second kind of monetary policy isn't used very often because it can lead to inflation. Changing interest rates, on the other hand, is a method that is used quite frequently for slowing down or speeding up the economy. So how does it work?

Basically, commercial banks - the ones that you and I use to keep our savings in and to borrow from - borrow their money from the country's central bank. This is the national or government bank, and it has the power to set interest rates. The interest rate of the central bank will influence the rates commercial banks set for their customers. When interest rates go up, borrowing money becomes more expensive. When they go down, it becomes cheaper.

People get loans from banks for all sorts of reasons, but the biggest loan most people take out is to buy a house. This kind of loan is called a mortgage. When interest rates increase, mortgages become more expensive. People who already have a mortgage will need to pay more on their repayments, and will have less money to spend on other things. Fewer people will want to buy new houses and house prices will fall.

In turn, home owners will feel less confident about their own wealth and will spend less. As a result, the economy slows down. A fall in interest rates will have the opposite effect on the house buying chain.

Consumers also buy other things using borrowed money. This is called buying on credit, and interest rates will also affect how much people spend on credit. Purchases made using credit cards are now a huge proportion of total spending in many countries. This means that interest rate changes have a big impact on consumer spending and the economy as a whole.

Companies, too, are affected by interest rate changes. When interest rates are low, they feel more confident about investing in order to expand their business. Low interest rates will encourage them to take out loans in order to build factories, buy machines and increase production. All of this increases the size of national output. Again, higher interest rates will have the opposite effect.

Finally, interest rates can have an effect on the amount of exports a country sells. This is because the value of a currency (the exchange rate) often falls when the interest rate falls. When the value of a currency falls, a nation's products and services become cheaper for customers from other countries. This increases export sales, and more money comes into the economy. And, of course, a rise in interest rates will mean a rise in the exchange rate. This will reduce export sales, and reduce the total output of the economy.

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Monetary policy is another tool that governments use to control the economy. Monetary policy mainly involves making changes to the interest rate. It can also involve changing the amount of money that circulates round the economy. However, this second kind of monetary policy isn't used very often because it can lead to inflation. Changing interest rates, on the other hand, is a method that is used quite frequently for slowing down or speeding up the economy. So how does it work?Basically, commercial banks - the ones that you and I use to keep our savings in and to borrow from - borrow their money from the country's central bank. This is the national or government bank, and it has the power to set interest rates. The interest rate of the central bank will influence the rates commercial banks set for their customers. When interest rates go up, borrowing money becomes more expensive. When they go down, it becomes cheaper.People get loans from banks for all sorts of reasons, but the biggest loan most people take out is to buy a house. This kind of loan is called a mortgage. When interest rates increase, mortgages become more expensive. People who already have a mortgage will need to pay more on their repayments, and will have less money to spend on other things. Fewer people will want to buy new houses and house prices will fall.In turn, home owners will feel less confident about their own wealth and will spend less. As a result, the economy slows down. A fall in interest rates will have the opposite effect on the house buying chain.Потребители также купить другие вещи, используя заемные деньги. Это называется покупка в кредит, и процентные ставки также будет влиять на сколько люди тратят на кредит. Покупки, сделанные с помощью кредитных карт в настоящее время огромная доля от общего объема расходов во многих странах. Это означает, что изменения процентных ставок имеют большое влияние на потребительские расходы и экономику в целом.Компании, также страдают от изменения процентных ставок. Когда процентные ставки являются низкими, они чувствуют себя более уверенно об инвестировании, с тем чтобы расширить свой бизнес. Низкие процентные ставки будут поощрять их к брать кредиты для того, чтобы строить заводы, Купить машины и увеличить производство. Все это увеличивает размер национального производства. Опять же более высокие процентные ставки будут иметь противоположный эффект.И наконец процентные ставки могут иметь влияние на объем экспорта, который страна продает. Это потому, что значение валюты (валютный курс) часто падает, когда процентная ставка падает. Когда значение валюты падает, продуктов и услуг нации становятся дешевле для клиентов из других стран. Это увеличивает экспортные продажи, и больше денег поступает в экономику. И, конечно же, повышение процентных ставок будет означать рост обменного курса. Это снизит экспортные продажи и уменьшить общий объем производства экономики.