MONETARY POLICY

Date: 2015-10-07; view: 599.

Reading 2

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 type 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 payments, and will have less money to spend on other things. Fewer people will want to buy new houses and house prices will fall.

E Comprehension