Readers Question: Explain why Keynesians would argue that demand management policies are the most effective way of increasing the equilibrium level of output. Keynesian fiscal stimulus is a decision by the government to increase government spending financed by government borrowing. Keynes advocated fiscal stimulus when the economy was stuck in a recession. In this situation, …
Readers Question: I have been learning about inflation for AS at the moment. I would like to know about whether inflation would be a short-term phenomenon as we were told inflation takes place when there is excess demand and price will rise, it will also encourage the company to produce more. Therefore, shouldn’t it be …
Readers Question: Actually, I would like to know if the current UK’s recession is caused whether economic policies which have been practised or the UK has been affected from outside the country? The recession is caused by a mixture of domestic and international factors. For more detailed explanation see: Economic crisis explained Who is to …
Readers Question: why are banks still not lending despite the bail out and increase in money supply? If all this time they have taken risk, why cant they take risk anymore? They should have more borrowers now due to low interest rates,if they can help small business who need the money then growth can increase …
The Neo-Classical Theory of Firms makes the following assumptions Firms are profit maximisers. Firms will maximise profits where MR=MC In the short run, firms are subject to diminishing returns. In the short run, capital is fixed, therefore MC is upwardly sloping after diminishing returns sets in. Prices are flexible. If there is a shortage of …
Banks are getting a lot of criticism at the moment and most of it is justified. What mistakes did the banks make? Bonuses which encouraged Risky Short Termism If managers gained short term profit for the bank, they would be in line for large bonuses. If they lost money, they didn’t get a pay cut. …
Readers Question: What does it mean when Bank of England cuts interest rates by 50 base points? A basis point is one-hundredth of a percentage point. If the Bank of England cuts interest rates by 0.50% from 1.5% to 1.0%. This is a cut of 50 basis points. Usually, interest rates are cut in small …
Readers Question: Evaluate policies which a government could adopt in response to falling behind mortgage payments The problems of mortgage defaults are explained here What can the government / monetary authorities do? Cut interest rates. The MPC can cut interest rates as long as inflation is not a problem. However, the government do not set …