Cambridge International as and a level Economics Ebook

particularly government bonds. This measure 
indirectly lowers the rate of interest. This is because 
the higher demand for bonds pushes up their price 
and enables a lower interest rate to be paid on 
them. A lower interest rate may increase consumer 
expenditure and investment.
Another monetary policy measure used by both the 
central banks of the USA and UK was forward guidance. 
This measure involves a central bank outlining its 
future policy approach. For example, in August 2013, 
the Bank of England announced it would keep interest 
rates unchanged until unemployment had fallen to 7%. 
The intention of forward guidance is to provide greater 
certainty and so to encourage investment. It is regarded 
as a monetary policy measure as it is connected with 
decisions on the rate of interest.
Read the feature below and then answer the questions that follow.
1
In what circumstance would quantitative easing 
allow a central bank to move the change in the price 
level back in line with its infl ation target?
2
What 
eff ect may quantitative easing have on the 
price of shares?
3
Explain what could reduce the eff ectiveness of 
forward guidance.
encourage workers to increase their working hours and 
accept promotion and greater responsibility. It may also 
persuade some workers to stay in the labour force for 
longer and persuade others to enter the labour force.
A reduction in welfare payments may encourage some of 
the unemployed to put more eff ort into searching for a job.
Increasing spending on education and training may raise 
the quality of education and training. If this does occur, 
workers’ skills and productivity may increase as well as 
their fl exibility and mobility. Trade union reform may also 
increase workers’ fl exibility and mobility and cut down on 
the number of days lost through strikes. Increasing spending 
on infrastructure can reduce fi rms’ transport costs.