The real interest rate is the nominal interest rate – inflation rate. For example, if the Bank of England set base rates of 5.5% and the CPI inflation rate is 3.4%. Then the real interest rates is said to be 2.1% A higher real interest rate is good for savers and bad for borrowers. Note, …
Is there any relationship between the base interest rate and the savings ratio? In theory, the interest rate can affect the decision to save in two ways. Substitution effect of change in interest rate – lower interest rates reduce the incentive to save because of relatively poorer returns – lower interest payments. When interest rates …
The 1980s was a period of economic volatility. There was a deep recession in 1981 as the government tried to control inflation. The recession particularly hit manufacturing causing unemployment to rise to over 3 million. Unemployment did not fall until the mid and late 1980s when the economy boomed during the “Yuppie-years” of rising wages, …
Readers Question: Who owns the Bank of England? The Bank of England is owned by the UK government. From Bank of England website “As a public organisation, wholly-owned by Government, and with a significant public policy role, the Bank is accountable to Parliament” Bank of England The Bank of England was set up by, ironically, …
Transactional utility is a term to describe the happiness a consumer gets from the perceived value of the deal. ‘Transactional utility’ was developed by Richard Thaler and is said to be the difference between the actual price and your reference price – the price you expect to pay. Example, Suppose you expect to pay $50 …
A recession is defined as a decline in real GDP for two consecutive quarters. An economy is in an official recession after six months of falling national income. A recession will typically lead to higher unemployment, a decline in confidence, falling house prices, decline in investment and lower inflation. However, although that may seem quite …
Definition of a Veblen Good. A Veblen good is a good where demand rises as price rises because people feel its higher price reflects greater status. Readers Question: I once ran across a term and now can’t find it. It’s the economic theory that consumers will purchase a product or service which cost more money …
A lagging indicator is an economic statistic that tends to have a delayed reaction to a change in the economic cycle. A leading indicator is an economic statistic that tends to predict future changes in the economic cycle. A co-incident indicator is a variable that changes with the whole economy. The recession of 2008 was …