Premium decoy pricing is when a firm set the price of one good deliberately high in order to make other goods appear good value and attractive. For example, a clothes shop may have a few jackets priced at £300. This gives the impression that the clothing brand is high quality. Then they may offer a …
Investment is expenditure on capital goods – for example, new machines, offices, new technology. Investment is a component of Aggregate Demand (AD) and also influences the capital stock and productive capacity of the economy (long-run aggregate supply) Summary – Investment levels are influenced by: Interest rates (the cost of borrowing) Economic growth (changes in demand) Confidence/expectations …
Money illusion is the belief that money has a fixed value and the effects of inflation are ignored. Because of money illusion, during inflation, individuals may perceive an increase in nominal income as higher welfare – when this is actually an illusion and their real spending power has not changed because prices have risen at …
Seigniorage is the profit created by issuing currency, where the face value is higher than the intrinsic value. (production costs) Seigniorage income can also relate to the interest a Central Bank charges from lending commercial banks money. Seigniorage explained Early forms of money had a face value equal to the production costs – e.g. gold …
Is there a link between government debt and the interest rate on government bonds? One argument we often hear is that if government borrowing increases – we can expect higher bond yields. Investors demand higher yields to compensate for the risk of government default. However, other economists argue this is misleading. If inflation is low, …
The broken window fallacy states that if money is spent on repairing the damage, it is a mistake to think this represents an increase in economic output and economic welfare. If money is spent on repairing a broken window, the opportunity cost is that individuals cannot spend money on more productive goods. The broken window …
Readers Question: explain how economists define ‘full employment’? The first definition of full employment would be the situation where everyone willing to work at the going wage rate is able to get a job. This would imply that unemployment is zero because if you are not willing to work then you should not be counted …
A look at how interest rates and inflation affect the exchange rate – in short, higher interest rates tend to cause an appreciation in the exchange rate. Readers Question: In currency investing, would it be more profitable to invest in a country with high-interest rates and high inflation, or low to zero interest rates with …