Define contagion: Contagion is the situation where there is growing concern about the state of a bank or firms financial affairs. This fear spreads making the initial situation worse due to a collapse in confidence. For example, if people worry that a bank may be going bankrupt then people will start withdrawing money. As people …
The Euro is a project of a monetary union and a single currency. The Euro involves a common currency and also a common monetary policy. Therefore, for membership to be successful, countries have to meet certain convergence criteria which include: 1. Inflation rate: No more than 1.5 percentage points higher than the average of the …
Core Inflation. This is a measure of inflation which excludes certain volatile and seasonal prices. It will be based on the Consumer price index but exclude prices such as Petrol (subject to oil price variations) Food (subject to seasonal variations) Core inflation will also exclude the impact of government excise duties. Core inflation is seen …
The cost principle means that when putting an asset or liability on a companies balance sheet, the actual monetary cost of the asset/liability is used. It is sometimes known as the historical cost principle because the cost of purchase is all important. Any change in market value or inflation is ignored. For example, suppose a …
Costs of production relate to the different expenses that a firm faces in producing a good or service. Types of costs Fixed costs – costs that don’t vary with output Sunk costs – costs that cannot be recovered on leaving industry, e.g. advertising Variable costs – costs relating to how much is produced (e.g. raw …
A credit default swap is a financial instrument for swapping the risk of debt default. The buyer of a credit default swap pays a premium for effectively insuring against a debt default. He receives a lump sum payment if the debt instrument has defaulted. The seller of a credit default swap receives monthly payments from …
Austrian economics places great stress on free markets. It argues government efforts to control the economy cycle invariably make it worse. The main criticisms of Austrian economics include: The belief in the efficiency of markets is countered by many examples of market failure. E.g. growth of subprime mortgages / securitisation leading up to credit crisis …
Free market economics believes government intervention should be limited to the protection of private property. It is advocated by many economists especially in the Chicago, and Austrian school of Economics. However, although free markets have advantages, such as greater efficiency, there are several criticisms levelled at purely free market economies. Criticisms of free-market economics Inequality. …