Supply is price inelastic if a change in price causes a smaller percentage change in supply. (PES of less than one) Example of inelastic supply – Price of rents falls by 20%; Q.Supply declines by 1%. PES = 0.05 Diagram of inelastic supply In this case, an increase in price from £30 to £40 has …
Readers Question: What are the effects of increased investment on aggregate demand in the short term and the long term. Investment means capital expenditure (e.g. purchasing machines or building bigger factory) Investment is a component of AD – AD+ C+I+G+X-M. Investment spending takes about 15% of AD; it is not as significant as consumer spending …
A lagging indicator is an economic statistic that tends to have a delayed reaction to a change in the economic cycle. A leading indicator is an economic statistic that tends to predict future changes in the economic cycle. A co-incident indicator is a variable that changes with the whole economy. The recession of 2008 was …
Readers Question: Evaluate the potential cost and benefits to the UK economy of adopting the Euro.” Costs of Joining the Euro Loss of independent monetary policy. In the Euro, interest rates are set by ECB but may be inappropriate for UK economy. For example, the 2008 recession hit the UK harder than other European countries …
Demand management policies are efforts to influence the level of aggregate demand (AD) in an economy. The two main types of demand management policies are: Monetary Policy Fiscal Policy To some extent, the exchange rate could be used to influence aggregate demand, but in practice, it is rarely used as a tool to influence aggregate …
A look at the extent to which policy makers face a trade off between unemployment and inflation. The Phillips curve suggests there is a trade off between inflation and unemployment, at least in the short term. Other economists are more sceptical.
Interest rates have a strong influence on house prices, principally because changes in the interest rate affect the cost of mortgage payments. How do interest rates affect house prices? If interest rates rise it will have a significant effect on increasing the cost of mortgages. Higher mortgage payments will deter prospective home-buyers – it becomes …
To what extent can supply side policies reduce unemployment? To try and reduce unemployment, the government can provide interventionist supply-side policies, such as better training and education or it can try free-market policies, such as increasing labour market flexibility. However, there is a limit because supply-side policies are ineffective in dealing with cyclical (demand-deficient unemployment) …