Next Homework:

1) What are the arguments for a rise in Bank rate at the current time?


The current Britain inflation rate is 3,3%. Current Bank rate is 0,5%. Such a difference makes further inflation increase possible and probable. The threat of higher inflation is high and, therefore, some say that increase in interest rate is inevitable.

2) What are the arguments against a rise in Bank rate at the current time?


Higher interest rates may decrease the demand. After all, the higher they are the more expensive the mortagages. British economy is already vulnerable, so increasing the i.r. is a risk of another economic slow down.

3) What information would you require to decide which of the arguments was the
more powerful?


The type of inflation has to be considered. Todays inflation comes from indirect taxation, food and energy, which , as experts argue, the MPC has not real influence on. So increase of increase rates may be actually a worse solution, regardless the current rate of inflation.

4) Why is it difficult to decide the size of the output gap?


Because in such difficult and unpredictable economic times it is hard to guess what potential GDP is going to be.

5) To what extent do the arguments for and against a rise in Bank rate depend on
the factors determining expectations, and what expectations are important here?


Most of all the increase of the wages is to be considered. If wages are to increase, than the increase of i.r. would be more likely, as people would afford more expensive mortgages.

6) To what extent are exchange rates relevant to the effectiveness of interest rate
policy?