Benefits of Reducing the Value of a Currency

Readers Question: What is the benefits of reducing the currency of some country? Reducing the value of a country is better known as a depreciation or devaluation. It means that the currency will buy less foreign exchange. But, people from other countries will find it cheaper to buy the currency. If there is a devaluation …

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Euro Economy in 2008

News that inflation in the Eurozone increased to 3.2% did little to cheer market sentiment in Europe. This rise in inflation leaves Europe in a difficult situation with the prospect of lower growth and higher inflation.

In the US, the Fed has aggressively  cut interest rates from 5.25% to 3%. The Fed is hoping that the rate cuts will prevent a recession. However, the rise in Euro inflation means that the ECB has less scope for cutting to rates to help boost growth and support declining stock markets.

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Mistakes of Lawson and Thatcher

When I began studying economics as an A Level student I found it interesting to examine the mistakes of politicians. One thing that struck me was that politicians often seemed to have a very poor understanding of basic economics. Of course, it is easy to be wise after the event, but here I wrote an …

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Why is Government Reluctant to Boost Demand?

Readers Question. Explain how interest rates could be used to boost the economy. Why, then do the govenment frequently hesitate to take such steps.

Interesting Question.

Generally, lower interest rates help increase consumer spending, investment and economic growth. Lower interest rates help increase Aggregate Demand for various reasons.

  1. Lower interest rates make borrowing cheaper encouraging investment and spending
  2. Lower interest rates make mortgage payments cheaper, increasing disposable income of consumers.
  3. Less incentive to save. Therefore increased incentive to spend
  4. Lower exchange rate, making exports cheaper and boosting AD.

Most people in the economy like to see interest rates cut, especially homeowners and businessmen. Why then do Governments or Central Banks hesitate to cut rates?

  1. Lower interest rates can cause inflation. If Aggregate Demand increases faster than aggregate Supply, the economy will experience inflation. Inflation is said to create instability and uncertainty in the economy.

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Economics of the Fire Service

Readers Question: Why the fire service is a public domain and how is the fire service a merit good

I think you mean why is the Fire Service a public good?

A public good has 2 aspects.

  1. Non rivalry – Once consumed doesn’t reduce the amount available to others
  2. Non excludability – Once it is provided you can’t stop anybody using from it.

In a free market public goods are often not provided because there is difficulty getting everyone to pay for it due to the free rider problem

The fire service shares some aspects of a public good. If the fire brigade put out a fire, they can still go to another fire. Once you have instituted a fire service, they are prepared to put out anybody’s fire. When you dial 999 and ask for Fire, you don’t get asked “but, have you paid your annual fire payment”. They just come and are financed out of government taxation.

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Can Tax Cuts avoid a recession?

About £77 billion was wiped from the value of leading FTSE 100 companies over fears of a US recession. The FTSE 100 index is now down to its lowest level in 19 months.

In particular, stock markets were unimpressed by President Bush’s plan for tax cuts. In American politics tax cuts are often seen as the ‘solution’ to many economic ills. Reagan, Bush and many other politicians have hoped tax cuts both increases labour productivity and boosts demand. Some have even gone so far as to suggest that tax cuts pay for themselves. (people are so happy to have lower taxes they work many more hours ending up paying more tax)

Alas tax cuts may not increase Supply and they may have little impact on demand – it depends on when and how they are cut. See also: Can UK and US avoid recession

What is the impact of a cut in Income Tax on the labour Market?

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AD and Vertical LRAS

Readers Question 2. Imports. What if the extra J of 30 (that is supposed to boost AD to the right) is met completely by imports, when the AS is vertical (LRAS). you cant produce any more, so imagine the extra demand is supplied by importers. equilibrium cant go beyond LRAS, and prices shouldnt go up, because demand has …

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Why is UK Debt Rising?

The graph below show that UK debt is rising as a % of GDP



 Net Debt refers to the total amount of money the Government owes to the private sector. If the Government spends more than it receives in tax then it runs an annual budget deficit; this means it has to borrow from the private sector, by selling bonds and gilts. The National Debt is the cumulative amount of debt the government has.

Since 2003, the UK economy has been growing at 2.5% per annum, Unemployment is falling and employment levels are at record levels. In theory this should improve the government finances. This is because higher growth leads to increased tax revenues, also the government needs to spend less on unemployment benefits. However, the data show that total UK debt is increasing at a faster rate than GDP.

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