Economics help blog – Page 89

How Central Banks can act as lender of last resort

5 February 202030 November 2018 by Tejvan Pettinger

A look at how a Central Bank may act as lender of last resort to commercial banks and the government. A lender of last resort means if banks or the government are short of funds, the Central Bank will step into prevent illiquidity. This helps to maintain confidence in the banking sector. Lender of last …

Purchasing Power Parity (PPP)

2 February 202027 November 2018 by Tejvan Pettinger

Purchasing Power Parity PPP is a theory which suggests that exchange rates are in equilibrium when they have the same purchasing power in different countries. Purchasing power parity will involve looking at a basket of goods to determine effective living costs. The purchasing power parity is determined by dividing a basket of goods in one …

Functions and Examples of Financial Intermediaries

5 December 201926 November 2018 by Tejvan Pettinger

Definition of financial intermediaries

A financial intermediary is a financial institution such as bank, building society, insurance company, investment bank or pension fund.
A financial intermediary offers a service to help an individual/ firm to save or borrow money. A financial intermediary helps to facilitate the different needs of lenders and borrowers.
For example, if you need to borrow £1,000 – you could try to find an individual who wants to lend £1,000. But, this would be very time consuming and you would find it difficult to know how reliable the lender was.
Therefore, rather than look for individuals to borrow a sum, it is more efficient to go to a bank (a financial intermediary) to borrow money. The bank raises funds from people looking to deposit money, and so can afford to lend out to those individuals who need it.

What explains differences in economic growth rates?

30 April 202022 November 2018 by Tejvan Pettinger

Readers Question: Given the widely varying fiscal policies of countries, both left and right, how come their growth rates over the long term are so close? source: World Bank To some extent growth rates are close; though it also depends which data and countries you use. However, from a very broad perspective, growth rates do …

Government Price Controls

10 March 202021 November 2018 by Tejvan Pettinger

Government price controls are situations where the government sets prices for particular goods and services. Types of price controls Minimum prices – Prices can’t be set lower (but can be set above) Maximum price – Limit to how much prices can be raised (e.g. market rent) Buffer stocks – Where government keep prices within a certain …

J-Curve Effect

20 November 2018 by Tejvan Pettinger

The J Curve effect a depreciation in the exchange rate can cause a deterioration of the current account in the short-term (because demand is inelastic). However, in the long-term, demand becomes more price elastic and therefore, the current account begins to improve. The J-Curve is related to the Marshall-Lerner condition, which states: If (PED x …

What is Austerity?

18 January 202016 November 2018 by Tejvan Pettinger

Readers question: What is Austerity?

Simple definition of Austerity

Austerity involves policies to reduce government spending (or higher taxes) in order to try and reduce government budget deficits – during a period of weak economic growth.

Austerity policies are often associated with higher unemployment and lower economic growth.

Austerity policies (and automatic stablisers) have reduced levels of government borrowing since 2010.

More complex points and definitions of austerity

The term austerity is more likely to be used when government spending cuts and higher taxes occur during a recession or period of very weak economic growth. Austerity implies that spending cuts and tax increases are highly likely to have an adverse impact on aggregate demand and economic growth. For example, if the government increased taxes during an economic boom, this would probably not be referred to as austerity. But, if the government cut spending during a period of negative growth, this would be referred to as austerity policies.

What constitutes actual austerity?

A simple definition of austerity implies actual spending cuts. However, some may refer to austerity policies – even if there has just been a limit in the growth of government spending. For example, in the past 10 years, government spending may have increased on average by 3% in real terms. If the government now freezes public sector spending, this may be termed ‘austerity policies’ – because government spending is not increasing at the same rate as previously.
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Terms of Trade Effect

17 May 202415 November 2018 by Tejvan Pettinger

Definition: The Terms of Trade is the average price of exports / by the average price of imports. It is a measure of a countries relative competitiveness. If export prices rise relative to import prices, we say there has been an improvement in the terms of trade. – A unit of export buys relatively …