Monetary Policy

This policy deals with the influence that the supply of money has over the strength of the economy.

An increase in the supply of money in the community will allow people to spend more money. This will see an increase in Aggregate Demand which means that if suppliers are unable to meet the demands of their consumers then the price of their goods must rise in order to reduce the level of demand.

One of the major factors affecting the amount of money in the economy is the Public Sector Borrowing Requirement (PSBR). This is the amount of money government departments need in order to finance their operations outside of the money they are given in their budgets by government. The more money the PSBR demands from an economy’s banks then the less money available for everyone else. This means that the public sector ‘crowds out’ all other consumers if it is demanding a lot of money. With the supply of money getting lower, the price of money will rise if it is being demanded but unab...