To what extent can monetary policy help the UK economy avoid a recession in 2012?
Monetary policy is the attempt by the government or central bank to manipulate the money supply, the supply of credit, interest rates or any other monetary variables, to achieve the fufliment of policy goals. This policy is put forward by the monetary government (entity which controls the money supply of a given currency) of a country controls the supply of money. Monetary policies are often put in place to help increase or decrease interest rates for the purpose of promoting economic growth. In a period of negative economic growth the monetary policy will be put in place by the monetary government to help either get out of or avoid a recession altogether. The monetary policy helps avoid a recession in a number of ways. Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates in order to combat inflation. Monetary policy controls a recession and inflation by setting how much money is supplied in an economy. When an economy is in a recession the central bank will typically increase the money supplied which will help reduce interest rates; increasing spending. When inflation is a problem, the central bank will typically decrease the money supply, which will increase interest rates; slowing spending. The monetary authority will usually respond to a recession by putting forward an expansionary monetary policy, this policy will battle a recession by forcing big central banks to purchase government bonds, this will consequently reduce the banks reserve requirements and lower their short-term interest rates. This purchase of government...
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