(a) Explain why the central bank considers business expectations when making decisions on monetary policy. (100 words) (b) In February 2022, inflation in the UK was expected to increase to close to 6% in February and March, before peaking at around 7 ¼% in April. Despite this, the Monetary Policy Committee in the Bank of England increase the policy rate to 0.25% to 0.5%, even if some members recommended an increase to 0.75%. Using the 3-equation model, depict the UK economy in February 2022, and provide some reasons why the Bank of England did not increase the interest rate to 0.75% (or higher).
In the Financial Times article “UK businesses expect prices to soar in the coming year”
(3 March 2022) we can read:
“British businesses expect inflation to rise at its fastest pace for five years, according to a
Bank of England survey, […]
the Bank of England has often quoted high business inflation expectations […] in recent
months to support the need for further
(a) Explain why the central bank considers business expectations when making
decisions on monetary policy. (100 words)
(b) In February 2022, inflation in the UK was expected to increase to close to 6% in
February and March, before peaking at around 7 ¼% in April. Despite this, the
Monetary Policy Committee in the Bank of England increase the policy rate to 0.25%
to 0.5%, even if some members recommended an increase to 0.75%.
Using the 3-equation model, depict the UK economy in February 2022, and provide
some reasons why the Bank of England did not increase the interest rate to 0.75%
(or higher). (200 words excluding the graph)
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