Banking Collapse and the Withdrawal of money

by

Readers Question: What do you think would happen if all depositors of a bank requested their deposits?

The Banking would probably collapse – unless it could secure unlimited funding from a Central Bank or other banks.

If a bank has deposits of £10billion. The bank will keep perhaps 1% in liquid assets (i.e. cash that can quickly be given to customers who demand it. Therefore, out of £10 billion, the bank will have cash reserves of say £100million. We say it has a liquidity ratio of 1%. Therefore, if customers asked for £100 million to be withdrawn the bank could do it. However, once customers require more cash, it faces a problem – The bank doesn’t have the deposits in a liquid form.

What banks do is they lend out deposits to other people. This is how they make a profit.  They pay you 2% a year to save money, then lend to someone else and charge 7%. They can do this because usually people don’t want to suddenly withdraw all their money and it is more profitable than simply keeping money behind the counter.

Read more

How to avoid environmental damage in the economy

by

How do we avoid environmental damage in an expanding economy? It is not easy because a lot of environmental damage occurs as a result of negative externalities. In other words, the environmental damage from producing a good, driving a car primarily affects other people. Therefore, free markets are not efficient at dealing with environmental externalities. …

Read more

The Price of Orange Juice – readers question

by

Readers Question: an orange juice sells at $3
when sugar price rise, orange juice sells at $3.2
but why when sugar price drop, orange juice still $3.20?

Why?

Sugar is an ingredient in the price of orange juice, therefore if the price rises, firms pass on the cost increases to consumers. Because all the firms pass on the cost increases, firms do not really lose any sales and market share should remain the same. Demand for orange juice is fairly inelastic, there are not many close alternatives. If the price of orange juice increased, would you stop buying it?

This is straight forward. However, if the price of sugar falls why does this not get passed on to consumers.

Well, a firm may think if I cut prices I will be more competitive and therefore, more people will buy it. However, if I cut prices then others will follow suit and we will all be worse off. Therefore, it is better to keep prices high and make more profits. Here, there is little incentive to cut prices, especially if you assume other firms will follow your example. Every firm wants to hope prices remain high so they don’t cut them.

Read more

Supermarket Petrol and Competition

by

Readers Question: What are the consequences of competition between supermarket affiliated petrol stations and independent petrol retailers? Before the supermarkets entered the market for selling petrol, there was much less competition in the market for petrol. Therefore, independent retailers were able to set higher prices and gain higher profit margins. I believe prior to the …

Read more

Budget 2008 Summary

by

A.Darling’s first budget is good news for those who don’t drink, smoke or buy SUVs.
No major changes, but these are some of the main features of the budget.

  • Cigarettes up 11p a packet of 20.
  • Beer up by 4p a pint, wine 14p a bottle, spirits 55p a bottle.
  • Duties on alcohol will go up by 2% above inflation for next four years.
  • related: Should tax on alcohol rise?

Cars and Petrol

• From 2009, major reform of the vehicle excise duty. For new cars from 2010, the lowest-polluting cars will pay no road tax in the first year. Higher-polluting cars will pay more.

• Funding set aside for road-pricing proposals. (road pricing in UK)

• 2p increase in fuel duty is postponed for 6 months due to high price of oil

• For environmental reasons, fuel duty will rise by 0.5p per litre in real terms in 2010. This is said to be for green reasons, but, is very small % of price.

Housing

• From April, key workers, such as teachers and nurses, will be able to borrow money from shared equity schemes.

• Stamp duty on shared ownership homes will not be required until people own 80% of their home.

• More people should have the chance to have a long-term fixed mortgage, which a report shows can reduce the risks for first-time buyers and can keep them on the housing ladder. (but, not clear whether people will actually take them out)

• Sites for 70,000 more houses have been identified. (But, when they will be built is another matter)

Read more

What will be in the 2008 Budget?

by

On March 12th, Alistair Darling will deliver his first budget. With the economy slowing down, he is not left with much room for manoeuvre. Tax Revenues are less than the government hoped and the National debt is likely to soon exceed the government’s self imposed ceiling of 40% of GDP. In 2008-09 Mr Darling will …

Read more

Pound Sterling to Dollar – $2 = £1

by

The pound reached the symbolic value of $2 = £1 yesterday. This is the highest level since New Year’s Eve and is partly in response to the Bank of England’s caution in cutting interest rates. (Yesterday, the Bank left rates unchanged at 5.25%) Despite the slowdown in the housing sector the Bank still appear worried …

Read more

Consumer Spending 2008 / 2009

by

Readers Question: i was wondering if u could give me some insight on how these macroeconomic factors will affect household consumption in 2008/2009. thanks

Consumer Spending in the UK

This graph shows the strong correlation between consumer spending and economic growth. Since 2005, consumer spending has continued to increase at an average of about 3%

consumer spending

 Factors that Will Affect Consumer Spending in 2008/09

1. Interest Rates 

With high levels of debt in the UK (see debt UK), any change in interest rate will have a big impact on consumer spending. If interest rates fall, mortgage holders will face lower mortgage payments therefore they will have more disposable income. Interest rates are forecast to fall, therefore this could maintain reasonable levels of consumers spending however:

  • due to credit crunch many banks are not passing on B of England base rate cuts to their customers.
  • The bank have hinted interest rates may not fall very much, because of rising cost push inflation.
  • Lower interest rates may not boost spending if other factors have a stronger impact in detering spending

Read more

Continue Shopping →
Item added to cart.
0 items - £0.00
Checkout