Economics help blog – Page 259

Who Sets Interest Rates – Markets or B of E?

15 January 202013 February 2008 by Tejvan Pettinger

Readers Question: Interest rates are determined by the markets and not by the Bank of England-where’s the truth?

An interesting question.

Firstly, it is worth bearing in mind that there are different interest rates in an economy.

Bank of England Base Rate. This is the most important interest rate because it is the rate at which other commercial banks need to borrow from the Bank of England. Therefore, the base rate is an important determinant of other rates in the economy.

Generally, speaking the Bank of England is free to set base rates to achieve its target of low inflation CPI 2%+/-1. At certain times markets may pressurise the Bank of England to change rates, but largely the Bank of England is free to set rates depending on how it sees fit.

ERM crisis. in 1992, the government increased interest rates to 15% to try and protect the value of the £ (which was then in the ERM) However, the markets felt this interest rate was unsustainable in a recession. Therefore, people continued to sell pounds effectively forcing the £ out of the ERM and making the UK cut rates. This is an example of market forces forcing the monetary authorities to change interest rates, but, it is relatively rare.

Higher London Congestion Charge for Gaz Guzzlers

12 February 2008 by Tejvan Pettinger

It is interesting to note that Ken Livingstone has introduced a higher rate of the London congestion charge for cars which have high levels of fuel consumption (band G vehicles, which emit more than 225g of carbon dioxide per km) These are said to make up 15% of cars. It is clear that the policy is aimed at targeting the ‘chelsea tractors’ and encouraging people to buy energy efficient cars.I agree with this step, as I have always found that large SUVs 4WD to be unnecessary in London. They take up more space, are more dangerous (to pedestrians and cyclists) and contribute to higher levels of pollution. Therefore, it is good step to introduce a higher tax on these cars to take into account their higher social cost.

What is Most Serious Economic Problem Facing the UK 2008?

12 February 2008 by Tejvan Pettinger

I asked my Economics students to conduct a questionnaire, asking people in the street various questions about Economics. One Question was:

What do You consider to be the Most Serious economic problem Facing the UK at the moment. These are the most popular responses to far.

House Prices (50% of responses)
Government Debt
Ignorance because of fear
no response
No Problems

What I would consider the most serious Economic Problem:

High levels of consumer debt / bankruptcy
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Merger of Yahoo and Microsoft

9 February 2008 by Tejvan Pettinger

An interesting development is Microsoft’s bid to buy Yahoo. This would be one of the biggest mergers, and change the nature of the internet.

It is rather ironic that Google, have filed a complaint on the ground the new firm would have too much market power. It is interesting because it was Microsoft who was once seen as dominating the computer industry. But, it seems increasingly the case that it is Google which is looked upto as the dominating firm in the industry. The reason for the shift is simply that Google are dominating the biggest areas of growth – which is online advertising.

Microsoft has monopoly power in software like Microsoft Word, but, it is expected that people will increasingly choose software that can be downloaded online. Google’s dominance of search engines and online advertising mean that they will be in a position to benefit from this.

Policies to Increase Equilibrium National Output

29 January 20207 February 2008 by Tejvan Pettinger

Equilibrium national income occurs where aggregate supply equals aggregate demand. An increase in equilibrium national income requires an increase in long-run aggregate supply and aggregate demand. Equilibrium national income and Keynesian Consumption function We can also show equilibrium national income using a Keynesian consumption function. In this case, an increase in domestic aggregate demand (C+I+G) …

Readers Questions II

17 January 20145 February 2008 by Tejvan Pettinger

You are welcome to ask questions on Economics. I will post the answer on this blog, for everyone to benefit from. I shall try to answer the economics question and / or point to other resources but please bear in mind. The replies will be guidance and not for duplication. Your essays should always be …

GDP and Economic Development

5 February 2008 by Tejvan Pettinger

Readers Question: If there is a increase in GDP why is development often unseen? Higher GDP means an increase in National Output and National Income but it doesn’t necessarily lead to economic development this is for the following reasons: Investment takes Time. It takes time for improvements in statistics like education and literacy rates. Higher …

Are House Prices Set to Fall? (2008)

22 January 20204 February 2008 by Tejvan Pettinger

Graph showing Ratio of House prices to Incomes

This graph shows an interesting increase in the ratio of house prices to income. It is well know that UK house prices have increased significantly since 1993. In some areas the house price increase has been at least 300%, since the early 1990s. However, since 1998, house prices have been increasing at a much faster rate than incomes, meaning that the ratio of house prices to average disposable income is reaching an all time high of 6.

Note disposable income means the income after taxes have been paid.

Why House Prices are Set to Fall

The effect of this is that house prices are increasingly unaffordable for many first time buyers. People are simply being priced out of the market and so demand is likely to fall. Other reasons why prices may fall.
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