The UK has experienced an unprecedented era of historically low interest rates. Critics argue that this policy, while initially necessary to support liquidity, has created deep-seated vulnerabilities. By borrowing at near-zero rates, households have accumulated record levels of mortgage and consumer debt. Some economists argue that, by keeping borrowing costs artificially low, monetary authorities have prevented the "creative destruction" necessary for long-term growth, keeping low-productivity 'zombie' firms alive and inflating property markets.
Conversely, supporters of loose monetary policy argue that without sustained low rates, the UK would have suffered persistent demand-side stagnation and deflationary spirals. Low rates have kept unemployment low and protected household disposable incomes during successive supply shocks. However, as supply-side inflation pressures mount, any sudden reversal in interest rates risks exposing highly leveraged households and businesses to financial distress, raising concerns over systemic financial stability.
Extract D states: "...by keeping borrowing costs artificially low, monetary authorities have prevented the 'creative destruction' necessary for long-term growth, keeping low-productivity 'zombie' firms alive..."
Using the data in the extract and your knowledge of economics, evaluate the view that keeping interest rates at very low levels for a prolonged period is damaging to the UK's macroeconomic stability.
176 exam-style questions on AQA A Level Economics 2.4 Financial markets and monetary policy (A-level only), covering 2.4.1 The structure of financial markets and financial assets, 2.4.2 Commercial banks and investment banks, 2.4.3 Central banks and monetary policy, and 2.4.4 The regulation of the financial system. Each one has a worked solution and a mark scheme showing where the marks go.