How can the Central Bank use Monetary Policy to achieve Economic Prosperity

The central bank is headed by a committee of nominated members who meet every month to negotiate whether or not changes to monetary policy should be made. The way in which the central bank can improve the economic climate is via the use of the interest rate or quantitative easing. The interest rate is the rate at which the central bank lend money to the interbank market, this rate gets passed on through the transmission model until it reaches high street banks who charge firms or consumers the rate that we see. By increasing the interest rate we see consumer preferences changing (consumption represents 60% of aggregate demand) for example, rather than borrowing money to spend in the economy they will decide to save since the relative cost of borrowing and saving is higher. Similarly, an increase in the interest rate can impact the level of investment in the economy since firms decide to hold of investment projects until the cost of borrowing money is smaller. This change to the interest rate will have a contractionary impact on the level of economic growth since the level of aggregate demand will fall. This may be desired in a period of high inflation since increases in the price level can deter spending and cause a fall in GDP, but also result in the reduction of international competitiveness since the price of goods willl increase relative to other countries. Another way in which the central bank can use monetary policy to achieve economic prosperity is by the use of Quantitative easing. This is where the central bank buys government bonds from the private sector in order to release cash into the private sector market. By doing this it makes them more likely to lend to consumers and firms automatically stimulating growth through increases in consumption and investment. However, whilst this may seem positive, sometimes quantitative easing can lead to an increase in the value of assets causing the rich to get richer, since houses and financial assets increase in price, increasing the level of inequality in the economy. In general the monetary policy have the tools to invoke economic prosperity however it may be difficult to achieve it due to a number of interfering economic factors and social preferences which could contradict the policies put in place. Not only this but due to the inter connectivity of the UK economy, overseas economies can cause large amounts of uncertainty and stimulate economic crises, such as the 2007/8 stock market crash in the US.