Expansionary Monetary Policy

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  • Expansionary monetary policy aims to increase aggregate demand and economic growth in the economy.
  • Expansionary monetary policy involves cutting interest rates or increasing the money supply to boost economic activity.
  • It could also be termed a ‘loosening of monetary policy’. It is the opposite of ‘tight’ monetary policy.

When to pursue expansionary monetary policy

interest-rates

The recession in 2008/09, caused the Bank of England to cut interest rates dramatically to try and boost economic recovery. Interest rates fell from 5% to 0.5% in a few months

The MPC of the Bank of England has an inflation target of 2% +/-1. They also consider other economic objectives such as economic growth and unemployment. If inflation is forecast to fall below the target, they can consider loosening monetary policy to target higher inflation and enable a higher rate of economic growth.

Also, if the economy is forecast to enter into a recession, they are likely to cut interest rates and try to boost economic growth.

In some cases, they may pursue expansionary monetary policy, even if inflation is above target – if they think inflation is temporary and there is a greater risk of recession. (see: cost-push inflation)

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Primary Products

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Primary products are goods that are available from cultivating raw materials without a manufacturing process. Significant primary product industries include agriculture, fishing, mining, and forestry. Examples of Primary products oil water fish fruit crops wood Often developing countries have a comparative advantage in producing primary products. This is because many developing countries (e.g. in Africa …

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Are falling oil prices good for the economy?

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oil prices

In recent months, we have seen a dramatic drop in oil prices. For many consumers and business, this fall in the price of oil will be welcome reduction in the cost of living and a reduction in the cost of business. However, is such a steep fall in oil prices good for the economy? Benefits of …

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Interest rates definition

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interest-rates-define-example

Interest rates are the cost of borrowing money. Interest rates are normally expressed as a % of the total borrowed, e.g. for a 30-year mortgage, a bank may charge 5% interest per year.

Interest rates also show the return received on saving money in the bank or from an asset like a government bond.

Different types of interest rates interest-rates-define-example

 

Central Bank Base Rate

  • The base rate is the interest rate which the Central Bank lends money to the commercial banks.
  • This base rate is the most important interest rate because it tends to influence all the other interest rates in the economy.
  • If the Central Bank increases the base rate. Commercial banks find it more expensive to borrow from the Central Bank. Therefore, they pass this onto their consumers.
  • Indirectly, the Central Bank rate affects all interest rates in the economy – from mortgage rates to the saving rate you get in a savings account
  • How the Central Bank set the interest rate

Commercial Bank Rate

Commercial banks are free to set their own interest rates, but it tends to be strongly influenced by the Central Bank base rate. If they find it more expensive to borrow from the Central Bank, they tend to increase their commercial rates.

uk-base-rate-v-bank-svr-500x336

This shows that banks tend to follow the Central Bank base rate, but from 2009, there was a bigger gap between bank SVR and Base rate. Commercial banks didn’t pass the full base rate cut onto their customers.

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Economics Summary

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excess-supply

Economics is concerned with the optimal distribution of scarce resources within society. For example, economics is concerned with how individual decisions like how firms produce goods and which goods people buy. An important element in economics is concerned with the extent to which governments can intervene in the economy to improve economic welfare. Economics is also concerned with wider issues such as economic growth and unemployment – issues that affect the whole of society.

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Multiplier and income tax cuts

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multiplier-effect

Readers Question: Explain how a change in the rate of income tax is likely to affect the size of the national income multiplier ? The National Income Multiplier says that an initial increase in spending (injections J) can cause further rounds of spending. Therefore, the final increase in National Income (Y) is greater than the …

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Should the UK stay in the European Union?

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In the past few years, there have been a noticeable increase in the calls for the UK to consider leaving the European Union. A few years ago, we may have enjoyed complaining about EU directives on the bendy banana (which didn’t really exist) but it was taken as almost sacrosanct that membership of the EU was in the UK’s interest.

What has changed and would we really benefit from leaving – and negotiating a free trade agreement, which enables the benefits of EU membership without the supposed costs?

Should we stay in the EU?

The Ideal of European unity

The relative peace and prosperity in Europe since 1945, is a huge achievement, given the past century of inter-European conflict. Britain is an intrinsic part of Europe, whether it likes it or not. We should take the opportunity to be a member of the European Union and help maintain this European integration and harmony. If the UK left the EU, we would be increasingly politically isolated.

  • However, do we need to be a member of the European Union to achieve this? The UK could still contribute to European ideals without signing up for all the political and economic integration that the EU elite wish to pursue. European countries, who have stayed out of the EU, such as Switzerland and Norway maintain friendly relations with Europe.

Free Trade

One of the strongest benefits of the European Union is the fact that it is our main trading partner, and membership of the EU has helped reduce trade barriers – both tariff and non-tariff barriers. European trade is critical to the UK economy. Leaving the EU could put this important aspect of our economy under threat.

  • The hope of Eurosceptics is that we could leave the political integration of the EU, but maintain all the free trade agreements. Again the model is that Switzerland and Norway have not been disadvantaged by staying out of the European Union. Evidence suggests, the EU would be keen to accommodate the UK as a free trade partner.

“If the British cannot support the trend towards more integration in Europe, we can nevertheless remain friends, but on a different basis. I could imagine a free trade agreement.”

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Calculating Price Elasticity of Demand

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How to calculate price elasticity of demand. Price elasticity of demand = % change in Q.D. / % change in Price To calculate a percentage, we divide the change in quantity by initial quantity. If price rises from $50 to $70. We divide 20/50 = 0.4 = 40% Example of calculating PED When the price …

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