Monetary Policy $-$ End of Chapter Problems

Why does the Bank use interest rates to influence the economy?

Interest rates determine the

price level; by varying interest rates, the Bank pushes prices up or down, stimulating increased or decreased consumption.

reward for saving; by varying interest rates, the Bank encourages greater or less saving, thereby encouraging or discouraging capital formation, which affects economic growth.

opportunity cost of spending today; by varying interest rates, the Bank nudges people and businesses to spend more or less today, which affects the level of economy activity.

opportunity cost of work; by lowering and raising interest rates, the Bank encourages and discourages work effort, a key driver of production.