Economics Q + A – 6

You are welcome to ask questions on Economics. Though you might also like to try google custom search (top right) to see if the topic has been covered before.

I am looking to explain economic principles / ideas/ recent developments in economics. I can’t promise to answer, but will try if it meets the criteria below.

  1. Please don’t ask me to do your coursework / assignment e.t.c.
  2. Please don’t ask any maths calculations.
  3. The question and answer will be published here where everyone can see it (including your teacher).
  4. I aim to try and simplify economics; as a rough guide I would aim at an understanding similar to a good British A Level student.
  5. I am looking to explain economic principles / ideas/ recent developments in economics.
  6. I will answer as a new post, if you leave email address, I’ll usually send quick email. Check home page of blog for new post. With question and answers

I studied PPE at Lady Margaret Hall college, Oxford University, and currently work as an Economics A Level teacher. I have also examined several different economic units for Edexcel AS and A2.


By on June 18th, 2011

448 thoughts on “Economics Q + A – 6

  1. I have such question:
    Some economist argues that both (1) income tax increase and (2) increase in import have a similar effect on interest rate in his country. How this can be explained in the context of the IS-LM framework, while the LM curve is given and assumed to be an ”upward”-sloping curve?

  2. What are the economic issues faced by a country?When I search it I got what to produce,whom to produce etc. as answer,but I’m not looking for that,i want to know about issues such as inflation etc.
    (I’m searching these because I have to do a project on topic “Central banks role in managing a economy”)

  3. Thankyou so much for such brief, “Plain English” explanations. A rare find!

    My Q: can you see any reason the ECB can’t do a version of QE for Greece?

    Not necessarily the US/UK way of buying bank bonds and hoping; there may be other ways?

    But if they could do it somehow, interest-free, so that the new money gets out into the economy, with the proviso that the money will slowly be paid back, but only after Greece finally reaches some positive economic level?

    Wouldn’t that be more palatable for Greece than having to *borrow* from the ECB at impossible rates?

    (It seems that the liquidity trap / malinvestment [delete as applicable] will avoid any runaway inflation.)

  4. form a view about where the U.S economy is heading based on the economic concepts of the Aggregate Supply – Aggregate Demand Model. Based on the articles in the textbook chapter, what do you see as the main pressures on aggregate supply and aggregate demand? In which directions are they pushing or pulling the U.S. economy? Also, do you think the gap between real GDP and potential GDP will widen or narrow?

  5. Hi,

    my questions relates to calculating GDP, a very simple example.

    Hopefully, you can imagine a diagram, with “HOUSEHOLDS” on the left and “FIRMS” on the right side a paper. In the TOP half of the paper, labour is offered to [–>] firms, for which households get income.[in this instance, the firms produce bread]

    On the BOTTOM of the page, households BUY this bread which causes them to have EXPENDITURE to the firms.However, those running the firms are part of the household sector, too, so they also have income (wage + extra profit from firm when wages are already paid). Thus, a cycle is formed.

    The author now explains that EITHER the top OR the bottom half of the circular flow can used to determine total GDP, counting them as total income and expenditures respectively.

    My QUESTION: Isn’t it that both have to be added? Because, we could look at the economy only being composed of the first transaction of rendering labour so households get income. – Another economy might only have firms selling breads so this is the only thing contributing to GDP. Therefore, when looking at both in one economy, as in the example given, than shouldn’t we add them up?

    This is an example from a distinguished textbook which is I am most likely the person making the mistake. I will realy, really appreciate your help!

  6. I am reading from a textbook about business cycles, but i don’t understand what does the word systematic means in this context: “If p(Xt,Ct) (this is the coefficient of correlation between two cyclical components) is positive but less than 1, x and c will tend to move in the same direction, with the co-movement being more systematic the smaller the deviation of p(Xt,Ct) from 1” I hope you can help me with this question, so i can have a better understanding of this concept.

  7. I have to visit the college I went to and give 5-10 min talk to A2 Economics students about anything economics related, preferably macro-economics.. something going on in the economy. Suggestions?

    1. Choose a topic, like say austerity. Then break it up into 5 different subsection:
      – What is austerity.
      – Why austerity?
      – What is the impact of austerity?
      – What was the alternative?
      – How did austerity impact Europe?

  8. Hello,

    Could you define what you mean by Public Work Scheme as it relates to Fiscal policy and stimulating the economy or an economy. (Second question) How do bond spreads affect the value of the Dollar or Euro?

    Thank You,

    1. Public work scheme is like a decision by government to spend £500m on building new roads. This extra £500 is expansionary fiscal policy. It is a net injection and should increase AD>

  9. why does the central bank purchases or sells out foreign exchanges?
    why is inflation refferd to as public’s enemy no. 1?
    in simple terms what is the difference between credit and money?

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