Inflation targeting means Central Banks are responsible for using monetary policy to keep inflation close to the agreed target (usually around 2%). Since the mid-1990s, inflation targeting has become widely adopted by developed economies, such as UK, US, and the Eurozone. Inflation targets were introduced to help reduce inflation expectations and help avoid the periods …
Explanation of why government intervention to try and correct market failure may result in government failure. Summary Market failure is a socially inefficient allocation of resources in a free market. Market failure can occur for various reasons Externalities Demerit/merit goods Public goods Monopoly power Government failure occurs when government intervention results in a more inefficient …
Demand deficient unemployment occurs when there is insufficient demand in the economy to maintain full employment. In a recession (a period of negative economic growth) consumers will be buying fewer goods and services. Selling fewer goods, firms sell less and so reduce production. If firms are producing less, this leads to lower demand for workers …
Readers Question: Discuss the circumstances in which reducing the exchange rate and introducing quotas are effective policies to tackle a trade deficit. The trade deficit occurs when the value of imports is greater than the value of exports. This could reflect a lack of competitiveness or high levels of consumer spending on imports. The trade …
A recession is a fall in real GDP/ negative economic growth. To avoid a recession, the government and monetary authorities need to try and increase aggregate demand (consumer spending, investment, exports). There is no guarantee that they will work. It will depend on the policies and also the causes of the recession. The primary policies …
The 1920s are sometimes referred to as the ‘roaring twenties’, but for the UK economy, it was a period of depression, deflation and a steady decline in the UK’s former economic pre-eminence. In the US, the economy boomed on the back of mass production techniques, growing efficiency – and increasingly a credit bubble, which would …
Readers question: Please tell me some products for which equilibrium price is not favourable for some producers and consumers which invite the state to impose price restriction. The equilibrium price is the price determined in a free market; the price determined by the interaction of supply and demand. Under what conditions could this market price …
A deflationary spiral occurs when falling prices cause further deflationary pressures to cut prices. Deflation creates expectations of further price falls, and therefore consumers reduce their spending because they expect goods to become spending in the future. This fall in spending creates further deflationary pressure in the economy. Deflation increases the real value of debt. …