readers questions

The Euro and deflation

The Euro and deflation

A look at the effects of how an over-valuation of the exchange rate can cause deflation. Readers Question: does an appreciation in the exchange rate cause deflation? An appreciation does tend to reduce inflationary pressures. This is because after after an appreciation in the exchange rate: Price of imports will fall, causing a fall in cost-push inflation. Exports become less competitive, causing lower demand for exports. The rise in demand for imports and relatively lower exports will reduce domestic aggregate demand, helping to reduce demand-pull inflation. The appreciation may increase incentive for manufacturers to…

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How is the economy affected by recovery of the underground economy?

Readers Question What if the black money parked in Swiss bank is recovered. Will it destabilize the current economy? ‘Black money’ I assume you mean money gained by illegal methods and money that will be frozen until someone can prove they legally own it. Recovering frozen money One scenario – If there is a large stock of illegal money currently frozen in Swiss bank accounts and this is recovered and put back in the economy and spent. In theory, this injection of money into the economy could cause inflationary pressures. However, as…

UK Debt Held by Foreign Investors

One of the most common questions asked is, who owns UK National Debt? Often  people assume that UK government debt is owned by foreign investors. However, foreign investors only hold about 25-30% of UK government debt. The rest is held by the UK private sector (pension funds, insurance companies e.t.c). Recently, the Bank of England has also been purchasing Gilts under the Asset Purchase Scheme. In the past few years, the proportion of UK government debt held by overseas investors has been about 30%. A different, but similar, concept is

Fiscal Spending and Crowding Out

Fiscal Spending and Crowding Out

A look at whether higher government (fiscal) spending causes crowding out? Crowding out occurs when government spending leads to a corresponding fall in private sector spending, therefore the higher government spending has no overall increase in domestic demand. Readers Question: Examine the way in which fiscal spending inflates prices and crowds out private spending. Government spending is a component of AD. Therefore, if we have an increase in Government spending, we would get an increase in AD (AD=C+I+G+X-M) If AD increased faster than Aggregate Supply, we are likely to get an increase in…

Readers Questions II

Readers Questions II

You are welcome to ask questions on Economics. I will post the answer on this blog, for everyone to benefit from. I shall try to answer the economics question and / or point to other resources but please bear in mind. The replies will be guidance and not for duplication. Your essays should always be your own work. My speciality is economics for British A Level standard. My university economics is rusty in parts, because generally I don’t use it in teaching A level economics. I can’t guarantee to always give full answers it…

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AD = C + I + G + X – M

Readers Question: what does AD stand for in economic terms?? AD = Aggregate Demand. Aggregate Demand is composed of various factors C, I, G, X – M C= Consumer spending I = Investment (Gross fixed Capital Formation) G= Government Spending X= Exports M= Imports AD places a crucial role in determining the level of national output in an economy. Although Monetarists will argue it is AS which will determine the long run trend rate of growth.

Keynesian Approach to AD and Real GDP

Keynesian Approach to AD and Real GDP

Readers Question: What are the effects of a decrease in foreign incomes on UK exports, how will this effect the equilibrium level of income and the balance of trade? Quite a few readers have asked this question. Unfortunately, A Level economics no longer uses the Keynesian 45 degree line approach to solving problems such as this. The last time I used this Keynesian model was quite a long time ago, so I am a bit reluctant to answer this kind of question. Nevertheless I will try offer some ideas. Firstly, it…

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Effects of Recession on Business

Readers Question: What will happened to the income of business sector if there is an economic decline in America? An economic decline in the United States, is pretty much guaranteed to reduce the income of the business sector. The recent falls in the US stock markets are largely due to  expectations of a future downturn in the economy. Lower growth leads to lower profits, therefore dividends decline and shares become less attractive. If the US enters into recession, firms will experience a decline in profitability. This is because: Tendency for…