As Macro Essay

Shortly after his appointment in 2013, the new Governor of the Bank of England Mark Carney implemented a strategy of “forward guidance”. When presenting this strategy he said that the Bank would not consider raising interest rates until the unemployment rate has fallen to 7% or below.

However, that link could be put aside if the inflation rate threatens to rise above 2.5% in the medium term.

Write an essay, not exceeding 1500 words, explaining the macroeconomic rationale for this strategy. Your analysis MUST include use of the closed economy IS-LM model. However, you may in addition use any other macroeconomic models or concepts covered in this course.

Important: You must include at least two line diagrams in your essay, although equations may also be used. If you do not include diagrams in your essay, you will not receive a pass mark.

When interest rate increase, investment decrease (use IR-I diagram), the consumption decease, total output Y decreases, which means need less people for producing. The unemployment rate will increase. Therefore only increase IR when unemployment is not so high (when it falls to 7%)

What is forward guidance?

It is making a promise about the future, particularly about future interest rates.

The Bank of England, like other central banks, directly controls the short-term interest rate at which it lends to or borrows from the High Street banks overnight.

This is the interest rate that gets set at each of the Bank of England's monthly Monetary Policy Committee meetings.

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[ 1 ]. See below for a definition of “line diagram”