What is the main tool of monetary policy and how is it used?
The short-term interest rate to affect the cost of money. Consequences:
1. Changing cost of borrowing will affect spending decisions. It also affects the relative attraction of spending today or spending later, in that a rise in rates will make saving more attractive.
2. A change in rates affects the real incomes of borrowers and lenders, A rise or fall in interest rates has a significant impact on spending power.
3.A change in the rates affects the value of certain assets, notably property and shares.