Inflation is above target. A bicycle manufacturer expects a new production line to earn a return of 5% a year. Following a rise in Bank Rate, the interest rate on the required loan increases from 4% to 6%. Why could this create a policy trade-off?
The project may be cancelled because its 5% return no longer covers the 6% loan rate, while lower spending may reduce inflation.
The project may be cancelled because the loan is dearer, while lower spending may increase demand-pull inflation.
The project may still go ahead because Bank Rate affects households rather than firms, while lower household borrowing may reduce inflation.
The project may still go ahead because 5% exceeds the previous 4% loan rate, while lower spending may reduce inflation.
116 exam-style questions on OCR GCSE Economics 3.6 Monetary policy, covering 3.6.1 What is monetary policy, 3.6.2 Monetary policy and macro objectives, and 3.6.3 Effects of monetary policy. Each one has a worked solution and a mark scheme showing where the marks go.