1. In 1997 the bank of england gained operational independence to set monetary policy. Their recent policy has put interest rates at their lowest in histroy which is currently at

2. 0.5%. Interest rates determine the cost of borrowing and the reward for saving. The low reward for saving

3. will encourage households to spend there money rather than save because with low interest rates and high inflation, financially they’d be worse off saving. Regarding the reduced cost of borrowing, the biggest type of borrowing you’d do in your life is

4. taking out a mortgage. The repayments on your mortgage will drop as long as your mortgage is a variable rate mortgage that tracks the banks of England's base rate. Paying lower repayments will increase an individuals

5. disposable income and this is likely to lead to them consuming more goods and services. The lower mortgage repayments will also cause the demand for houses to

6. increase. As demand increases so will the value (price) of houses which creates a wealth effect which makes people feel they are

7. more wealthy as their property is now worth more and this will lead to them consuming more goods and services even though their income has not risen. Secondly the lower cost of borrowing will increase the demand of

8. big ticket consumer durables because these types of goods and services are expensive and often require a loan i.e. white goods or a car. All this increase in consumption from the change in interest rates will lead the government achieving its macro economic objective of

9. economic growth. As the economy grows and increase output this will also help reduce cyclical unemployment as labour is a derived demand for output. The increase in consumption will also lead to a

10. multiplier affect where as unemployment falls, average income will rise and consumption will rise again. The bank of England have stated that interest rates will not rise until unemployment falls below

11. 7%. This suggests that the Bank of England’s aim is not only to control inflation but also achieve growth too.